OREANDA-NEWS. Fitch Ratings has affirmed South Korea-based Construction Guarantee's (CG) Insurer Financial Strength rating (IFS) at 'A'. The Outlook is Stable.

KEY RATING DRIVERS

The rating reflects Fitch's view that CG continues to enjoy strong government support, as evidenced by CG's key role in the construction industry and heavy state involvement in its operations. The rating also considers its solid capital position relative to its business profile and its sound liquidity position. However, the company's business is concentrated in the domestic construction sector, which is highly correlated with the economy.

The Stable Outlook reflects Fitch's expectation that CG will maintain its healthy financial fundamentals, based on the company's prudent management approach.

CG's guarantee premiums written to total equity was below 0.5x at end-2014, indicating a sound capital buffer for its business profile. CG operates under a regulatory capital regime that is modelled after the Basel II capital framework. Its regulatory capital ratio was 323.5% at end-2014 and 316.6% at end-2013, well in excess of the regulatory minimum of 100%, which provides a deep cushion for its potentially volatile business portfolio. Based on unaudited statistics, pre-tax return on assets for 2014 amounted to 3.2% (2013: 2.6%).

CG faces the challenge of managing risks inherent within its cyclical niche business. The company is also subject to South Korea's economic cycles in view of its limited business and geographical diversification. CG plans to gradually diversify overseas to support the construction activities of Korean companies abroad.

CG is a cooperative established in October 1963 to promote the growth and development of the construction industry by offering financing and guarantee insurance services to its members. CG is governed and regulated by the Ministry of Land, Transport and Maritime Affairs and must obtain prior approval from the ministry on various operational activities. It sources its business solely from the South Korean market.

RATING SENSITIVITIES

Key triggers for an upgrade are the prudent risk management of its business concentration in the construction sector and a diversification from the industry, while maintaining its sound financial fundamentals, including a consistently solid capital buffer to support domestic and overseas business growth. Conversely, key triggers for a downgrade include a significant deterioration in the credit profile, for example with its guarantee premiums written to equity consistently at above 2x.