A.M. Best Affirms Ratings of MERITZ Fire & Marine Insurance Company, Ltd.

Revises Outlook to Positive

OLDWICK, N.J. -- A.M. Best Co. has affirmed the financial strength rating of B++ (Very Good) and the issuer credit rating of "bbb+" of MERITZ Fire & Marine Insurance Company, Ltd. (Meritz) (South Korea). The outlook for both ratings has been revised to positive from stable.

The ratings reflect Meritz's continued improvement in capitalization, sustainable operating results with positive growth momentum, improved market profile after a change in corporate identity and strong long-term business performance.

Meritz's capitalization has improved over the past five years. The company's local solvency ratio improved from 179% in fiscal year 2004 to 193% in fiscal year 2005. This improvement is noteworthy due to Meritz's peers' weakened capitalization, which was measured in the same year. Meritz's risk-adjusted capital, as measured by Best's Capital Adequacy Ratio (BCAR), also showed an improvement during the past five years.

Meritz's underwriting performance also has been consistent for the past five years. As of fiscal year 2005, the company achieved a satisfactory operating performance. The company's net income increased by 25.1%, reaching KRW 26.4 billion (USD 27.4 million), and the adjusted return on equity (ROE) stood at 7.7%.

In October 2005, Meritz changed its corporate identity from Oriental Fire & Marine Insurance to Meritz Fire & Marine Insurance. The new corporate identity aims to improve customers' recognition of the company. As of fiscal year 2005, Meritz is the fifth-largest insurer in the Korean non-life market with a market share of 7.9%. Operating indicators such as persistency ratio and the renewal rate for the first half of fiscal year 2006 both suggest a favorable market reception of the company's new corporate identity.

Meritz experienced a favorable growth in the long-term business line. The company recorded the highest business growth in the industry of about 28% in fiscal year 2005 due to the growth in new contracts, especially in the protection-type policies, and sales from bancassurance channels. The company maintained its competitive advantage in the long-term business portfolio with one of the highest compositions of floating rate reserves among its major players. This reserve composition increases the company's flexibility to reduce its future liability in the guaranteed insurance policy in the event of a low interest rate environment.

Partially offsetting these rating factors are the fierce competition in the direct market, uncertainties in market deregulation and the relatively high underwriting leverage compared to its major competitors.

The direct channel has expanded very rapidly over the past few years. Excessive price competition in the direct market has worsened the industry's overall loss ratio. A.M. Best believes that the market competition in auto direct sales will remain intense.

Increasing deregulation in the industry will pose challenges for non-life insurers. Insurers must be proactive in formulating strategies with regard to deregulation in order to compete effectively in the market.

Meritz's underwriting leverage remains high relative to its peers. This high underwriting leverage might weaken the company's capital position and hinder its future business growth. Although Meritz has improved its local solvency ratio over the past few years, it needs to continue improving its leverage position going forward.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.