2007 Annual Report KOREAN RE

Transcription

1 2007 Annual Report KOREAN RE

2 WHO WE ARE Korean Re s predecessor entity was established in 1963 as a state-invested reinsurance enterprise. After the Company was privatized in 1978, it has since become the world s 12th largest reinsurance firm (and the largest in Asia), in terms of gross premiums. Korean Re s management targets include total assets of more than KRW5.0 trillion by 2010, and being a world class reinsurer by 2020, along with contributing to the overall advancement of the insurance industry. As Korea s sole reinsurance firm, Korean Re engages in a broad spectrum of non-life reinsurance and life reinsurance business activities. Major non-life reinsurance sectors include fire, comprehensive & engineering, marine & aviation, casualty, long-term, motor, and nuclear energy. The Company, which maintains a paid-in capital of KRW56 billion, includes a staff of 247 regular employees. It currently operates 3 affiliated firms abroad (Malaysia, Indonesia, and Thailand), 1 branch (Singapore), 1 locally incorporated company (Hong Kong) and 5 liaison offices (New York, London, Tokyo, Beijing, and Dubai). CONTENTS Key Financial Data 2 A Message from the CEO 6 Board of Directors 10 Review of Operations 14 Korean Re in the Market 32 Korean Insurance Market 35 Korean Economy Distinctive Culture of Korean Re 46 Key Events 48 Share Price of Korean Re 50 MD&A 52 Financial Section 57 Organization 70 Global Network 71

3 Where You Can Meet IDEAs For The Future At Korean Re, we diligently strive to continuously develop new ideas and innovative products for the benefit of our clients. Innovation is the essential cornerstone of our efforts to address challenges and realize steady progress. In line with this approach, the Company places a top priority on fostering the talent and professionalism of our human resources. In the meanwhile, the Company has sought to provide our clients with optimal protection, which we intend to further reinforce in the future. While keeping pace with the challenging business environment and changing needs of customers, we remain committed to developing a range of innovative products and services that are designed to assure clients with peace of mind, knowing that they are protected from losses. To help build a better world, Korean Re strives to fulfill our social responsibility as an exemplary corporate entity that actively engages in community-minded initiatives. These efforts include extending a helping hand to our underprivileged neighbors, such as farming families, the elderly, and minor-age heads of households, along with participating in environmental protection endeavors.

4 KEY FINANCIAL DATA Key Financial Data 3,672 Gross premiums +15.7%(YOY) KRW in billions 2,619 Net premiums +18.7%(YOY) KRW in billions 3,533 Total assets +12.4%(YOY) KRW in billions 183% Solvency margin ratio -14%p(YOY) Korean won in millions US dollars in millions FY2007 FY2006 FY2005 FY2007 FY2006 FY2005 For the year Gross premiums written 3,672,185 3,175,153 2,857,382 3,890 3,329 2,798 Net premiums written 2,619,259 2,207,337 1,987,006 2,775 2,314 1,946 Pretax net income 52,040 79,953 87, At the year end Total assets 3,533,422 3,143,898 2,777,442 3,528 3,311 2,819 Insurance reserves 1,905,233 1,560,357 1,370,706 1,903 1,643 1,391 Policyholders surplus 888, , , Financial ratio (%) Solvency margin ratio Combined ratio ROA ROE Payout ratio EPS(Won, US dollar) Note: Korean won amounts have been converted into US dollars based on the exchange rate of KRW per US$ 1.00 for FY2007, KRW for FY2006 and KRW1, for FY2005. For the B/S section, the applicable exchange rate was KRW1, per US$ 1.00 for FY2007, KRW for FY2006 and KRW for FY2005. Credit Ratings S&P A-(Stable) A-(Stable) A.M.Best A-(Stable) A-(Positive) 2

5 KEY FINANCIAL DATA Gross premiums written in FY2007 surged 15.7%, over the previous year, to KRW3,672 billion, while net premiums written grew 18.7% to KRW2,619 billion. Of significant note, adjusted net income, including catastrophe reserves, reached KRW100.5 billion, solidifying Korean Re s financial stability. GROSS PREMIUMS WRITTEN (KRW in billions) COMBINED RATIO (%) 2,387 2, , UP 15.7% in FY2007 (YOY) 3, , FY2003 FY2004 FY2005 FY2006 FY2007 Net premiums (KRW in billions) Earned premiums (KRW in billions) Operating assets (KRW in billions) 1,987 2,207 2,619 1,898 2,149 2,486 1,723 1,932 2,

6 2007 Korean Re Annual Report

7 A Message from the CEO 6 Board of Directors 10 Seize the Future Korean Re is poised to accelerate its efforts to develop new growth engines to fuel sustainable growth and to vault the Company to the top tier of the global reinsurance industry. Accordingly, the development of superior human resources is a foremost priority of Company management.

8 A MESSAGE FROM THE CEO A Message from the CEO ( ) FY2007 was a banner year for Korean Re as well, with gross premiums written and net premiums written soaring by 15.7% and 18.7%, respectively, to KRW3.67 trillion and KRW2.62 trillion. This impressive performance resulted from the effective application of innovative initiatives Net income after taxes in FY2007 amounted to KRW37.7 billion. When the catastrophe reserves of KRW62.8 billion, is taken into account, the profit figure reached KRW100.5 billion. To our valued clients and shareholders, I would like to express my sincere gratitude to our clients and shareholders, in Korea and abroad, for the confidence and support that you have shown us over the years. In FY2007, Korean Re sought to bolster its corporate reputation, as a premier global reinsurance firm, based on transparent management and forthright business practices. In the year under review, Korea s insurance industry enjoyed a sharp surge in direct premiums of 13.3%, from the previous year, amounting to KRW107.8 trillion, which contributed to the industry s best-ever profit performance. As for the non-life sector, it recorded a robust growth of 13.9%, on the strength of the long-term and motor insurance lines, while the life insurance sector was up a healthy 13.0%, boosted by heavy demand for variable life insurance. FY2007 was a banner year for Korean Re as well, with gross premiums written and net premiums written soaring by 15.7% and 18.7%, respectively, to KRW3.67 trillion and KRW2.62 trillion. This impressive performance resulted from the effective application of innovative initiatives, related to an enhancement of product offerings and pursuit of new market opportunities. Net income after taxes in FY2007 amounted to KRW37.7 billion, marking a decline of KRW20.0 billion from a year earlier; however, when the catastrophe reserve of KRW62.8 billion, is taken into account, the profit figure reached KRW100.5 billion. As such, Korean Re s adjusted net income has surpassed the KRW100 billion mark for 6

9 A MESSAGE FROM THE CEO Guided by a Global Vision 7

10 A MESSAGE FROM THE CEO 3 consecutive years, helping the Company to gain recognition as a world-class enterprise in Korea and abroad. Moreover, Korean Re continues to reinforce its internal infrastructure in order to realize sustainable growth for the future, which is essential for responding to the rapid changes in the global financial and reinsurance business environments. The Company is also pursuing the Global Korean Re vision, as a systematic effort to establish itself as a world-leading reinsurance firm by 2020, through stepped-up alliances with global reinsurers and optimization of our business capability. As a notable step in this direction, we recently launched an asset management consultancy subsidiary in Korea to capitalize on the synergy effects between the insurance and financial sectors. Indeed, we are steadily building a solid foundation to emerge as an integrated financial group, by taking advantage of our leadership position in the reinsurance industry. Meanwhile, the existing Korean Re global network, which includes offices in Singapore, New York, London, Tokyo, Hong Kong, and Beijing, has added a new liaison office in Dubai, UAE, to establish a business presence in the fast-growing Middle East region. The Company maintains professional and cooperative relations with its clients and shareholders through the adoption of ethical and transparent management, in regard to financial accounting and human resources. As a result of its business transparency and future-oriented corporate vision, Korean Re is highly regarded by stock market investors for its consistent profitability and attractive potential as a long-term investment. As a key player of the global reinsurance sector for several years, Korean Re strives to disperse the risks of large-scale natural disasters, which pose a threat to the stability of the global 8

11 A MESSAGE FROM THE CEO community. In addition, we continuously explore ways to strengthen the long-term, mutually beneficial relationships with our business partners. As a notable step in this direction, we recently launched an asset management consultancy subsidiary in Korea to capitalize on the synergy effects between the insurance and financial sectors. Indeed, we are steadily building a solid foundation to emerge as an integrated financial group. Based on its innovative corporate culture and customer-first focus, Korean Re is transforming itself into a global enterprise with a corporate philosophy and vision to help create a brighter future through the provision of equitable reinsurance services. Long known as the Land of the Morning Calm, Korea is rapidly evolving into a dynamic economic hub of Asia. As for Korean Re, we remain passionate in our efforts to contribute to the further advancement of Korea s reinsurance sector, along with fully satisfying our responsibilities as a true partner of the global reinsurance industry. Indeed, we are dedicated to advancing the interests of all our stakeholders, in order to enhance everyone s happiness. Sincerely, CEO Jong-won Park 9

12 BOARD OF DIRECTORS Board of Directors ( ) Korean Re boasts a management team who are committed to achieving sustainable growth of the Company. Chairman Hyuk-hee Won CEO Jong-won Park Executive Director Jeong-dae Kim Standing Auditor Yang-gi You Managing Director Sang-kyu Park Managing Director Dae-yeon Lim 10

13 BOARD OF DIRECTORS Director Chang-sun Park Director Ho-chul Shin Director Hyen-sig Shin Director Kyung-hak Lee Director Jong-gyu Won 11

14 2007 Korean Re Annual Report

15 Review of Operations 14 Korean Re in the Market 32 Korean Insurance Market 35 Korean Economy Leverage Every Advantage In response to today s challenging business environment, we are wholly dedicated to developing a variety of innovative products and services that are tailored to the specific needs of our clients. Moreover, all available resources are being allocated to the exploration of market opportunities abroad, in an effort to realize our long-term corporate vision.

16 REVIEW OF OPERATIONS ( ) In line with last year s positive results, Korean Re recorded an impressive performance. Total gross premiums swelled 15.7% in FY2007, over a year earlier, to KRW3.67 trillion. This growth rate further improved on the 11.1% increase recorded in FY2006. Review of Operations Overview KRW17.1 trillion in FY2007. In FY2007, driven by strong demand for life and long-term lines, the domestic insurance market continued to enjoy robust growth. Life insurance was up a sharp 12.8%, year on year, to KRW75 trillion, while long-term non-life insurance surged 19.0%, over the previous year, amounting to In line with last year s positive results, Korean Re recorded an impressive performance as well. Total gross premiums swelled 15.7% in FY2007, from a year earlier, to KRW3.67 trillion. This growth rate further improved on the 11.1% increase recorded in FY2006. By line, long-term lines were up 9.4%, continuing its steady upward trend in recent years thanks to the rapid aging of Korea s population. Contrary to expectations, motor insurance jumped to KRW432.1 billion, representing a gain of 18.8%, as compared to a 16.2% contraction in FY2006. Casualty insurance enjoyed solid growth, up 13.0%, to KRW565.8 billion. Fire, comprehensive, engineering & nuclear lines recorded a sluggish 3.4% growth, to KRW711.8 billion. This growth was lower than the previous year s 13.6% increase. Also noteworthy was the continued growth of overseas inward business, which soared 44.1%. This exceptional growth was attributed to the Company s strategy of seeking to further boost the share of its overseas business activities. 14

17 REVIEW OF OPERATIONS Overall Gross Premiums KRW3,672 billion SUMMARY OF GROSS PREMIUMS (KRW in billions) Class Fire, Comprehensive, Engineering & Nuclear Marine & Aviation Casualty & Bonds Long-term Motor Life Overseas Inward Total 3, , ,857.4 For Korean Re, in FY2007, the combined gross premiums for fire, comprehensive, and engineering insurance were up 3.4%, from a year earlier, to KRW billion. Fire, Comprehensive & Engineering In 2007, the property market in Korea continued its recent series of heavy losses, amidst fierce competition among domestic insurers. On the other hand, engineering insurance achieved an impressive performance, on the strength of a strong upward trend of business in overseas markets. For Korean Re, in FY2007, the combined gross premiums for fire, comprehensive, and engineering insurance were up 3.4%, from a year earlier, to KRW711.8 billion. Premiums for fire insurance showed a slight decline of 1.7%, year on year, to KRW186.1 billion, while that for comprehensive insurance inched up 1.4%, to KRW292.8 billion. As a reflection of recent customer preferences, comprehensive insurance has continued to outperform fire insurance by a considerable margin, creating a trend that is likely to continue in the years ahead. Breakdown of Gross Premiums 32.4% Engineering 41.3% Comprehensive 26.3% Fire 15

18 REVIEW OF OPERATIONS The growth of domestic market premiums for engineering insurance stalled in FY2007, while overseas engineering business recorded a noticeable gain due to active investment of Korean enterprises abroad, especially in the Middle-East Asia and China. Overall, in FY2007, the industry s domestic direct premiums written for engineering slipped 2.2%, from the previous year, to KRW178.8 billion. Overall, written premiums for engineering insurance amounted to KRW230 billion, an annual gain of 9.3%. In contrast to the domestic slowdown, Korean Re s overseas engineering written premiums ballooned 200% from the previous year, to KRW51 billion (including Korean Interest Abroad). Overall, written premiums for engineering insurance amounted to KRW230 billion, an annual gain of 9.3%. Overseas inward business will likely maintain its upward momentum in line with the Company s enhanced underwriting expertise and growing confidence among overseas clients. SUMMARY OF GROSS PREMIUMS (KRW in billions) Category Fire Comprehensive Engineering Total Risk Management for Fire Insurance Korean Re seeks to continually upgrade its technical services in order to maintain close customer relationships. The Company s highly knowledgeable and experienced risk management specialist are capable of addressing the diverse needs of clients, through such efforts as providing technical support, performing on-site surveys, analyzing major risks, and recommending optimum risk-control measures. In FY2007, the Company reinforced its risk management system for engineering insurance by employing a team of veteran engineers, with at least 15 years of field experience in civil engineering. This team oversees various risk management activities, including the identification, evaluation and monitoring of relevant risks. Standards are developed by the team to enhance the risk identification capability of underwriters, through the incorporation of construction methods and related risk exposure during various stages of construction. 16

19 REVIEW OF OPERATIONS Furthermore, Korean Re publishes and distributes its Risk and Insurance quarterly to direct insurers, policyholders, government officials and university professors to enhance client relations and the Company s corporate image. Risk and Insurance is recognized as a noteworthy resource for its dissemination of risk management techniques to industry professionals and related individuals. Nuclear The Korea Atomic Energy Insurance Pool (KAEIP), which is managed by Korean Re on behalf of its 12 member companies, wrote KRW30.5 billion of gross premiums for nuclear insurance in FY2007, up 5.9% from the previous year. The amount of domestic premiums in FY2007 was similar to that of the previous year; however, due to an increase of reinsurance premiums from European markets, overseas premiums recorded a growth of 14.8%, amounting to KRW14.0 billion. SUMMARY OF GROSS PREMIUMS OF KAEIP (KRW in billions) Category Domestic (Direct Insurance) Overseas (Reinsurance) Total In FY2007, the Korean market for marine Marine & insurance recorded gross written premiums of Aviation KRW622.5 billion, accounting for an 18.5% share of the overall non-life insurance sector. Compared to the previous year, the gross premium share of marine insurance declined 1.6% points in FY2007. The key factors behind this sector s subdued growth included a downward trend in cargo insurance rates and the lack of demand for satellite insurance from domestic concerns, in contrast to the 2 Korean satellites launched in FY

20 REVIEW OF OPERATIONS GROSS PREMIUMS (FY2007) Hull KRW in billions Despite the rather sluggish growth of the domestic marine insurance market, Korean Re has enjoyed exceptional results in this sector over the past five years. In FY2007, the Company s marine business surged 31.2%, year on year, related to gross premium written of KRW369.0 billion. This impressive performance resulted in large part from a recent upturn of government-assisted insurance, steady growth of hull coverage, and builders increased risks, in particular regard to offshore energy projects. Cargo 55.7 KRW in billions Aviation 40.8 KRW in billions Hull reinsurance, a primary emphasis of Korean Re s Marine Department, has recorded consistent growth in recent years, soaring 43.6% in FY2007, over a year earlier, to KRW272.5 billion of premiums. This surge in gross premium growth has been attributed to the Company s active entry into new business areas, such as offshore energy projects and overseas inward facultative business, which have enabled Korean Re to emerge as a key player in the global hull reinsurance market. In line with the Middle East s economic boom, Korean Re has moved to capitalize on new business opportunities in the construction cargo and offshore energy areas. Buoyed by management s efforts to assure adequate capacity, the Company has been able to underwrite another KRW20.0 billion of gross premium written for the offshore energy projects of Korea s leading shipbuilding yards, such as Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering. Gross Premiums for Marine & Aviation Growth31.2 % 18

21 REVIEW OF OPERATIONS Since its launch in 2004, the Company s aviation overseas inward facultative business has recorded steady growth in premium volume, amounting to more than KRW19.0 billion in FY2007, mainly involving the world s 50 or so most prestigious airline fleets. Moreover, Korean Re has provided capacity for satellite insurance for the launch of leading Asian and European telecommunication satellites since In FY2008, the marine insurance market is expected to experience a slowdown in growth rates due to a decrease in tariff rates and intensified competition. In response to these challenges, Korean Re intends to consolidate its leadership position based on the Company s unrivaled industry expertise and commitment to long-term business relationships. In FY2008, the Company expects to realize an annual growth of more than 10%, along with a stable loss ratio, by taking advantage of several new business ventures in various fields, such as government-assisted aquaculture insurance, aerospace projects abroad, and off-shore energy insurance. In FY2007, the Company s marine business surged 31.2%, year on year, related to gross premium written of KRW369.0 billion. This impressive performance resulted in large part from a recent upturn of government-assisted insurance, steady growth of hull coverage, and builders increased risks, in particular regard to offshore energy projects. The Company will put forth its utmost efforts to record steady profitability by generating a cost-effective premium volume and upgrading staff professionalism, along with strict adherence to a corporate philosophy centered on profit-based underwriting and the maintenance of mutually beneficial long-term relationships with our clients. SUMMARY OF GROSS PREMIUMS (KRW in billions) Category Hull Cargo Aviation Total Breakdown of Gross Premiums 15.1% Cargo 11.1% Aviation 73.8% Hull 19

22 REVIEW OF OPERATIONS Casualty In FY2007, the domestic market for casualty insurance recorded growth premiums of KRW2.33 trillion, essentially unchanged from the previous year s level, due primarily to sluggish growth of general liability insurance and notable shrinkage of bond insurance premiums. The liability insurance market also posted a growth rate that was similar to a year ago, as continuous rate reductions for liability coverage served to offset increased demand for D&O (directors & officers) and product liability coverage. Despite steady growth of the performance bond market, bond & fidelity insurance premiums incurred an 18% decline, year on year, amounting to KRW820 billion, as a result of a significant reduction of installment bond sales. The personal accident insurance lines, which account for a more 50% share of the casualty insurance sector, were up 26%, thanks to strong demand, stemming from expanded application of the five-day work week. Furthermore, the group insurance coverage for public officials, as an additional employee benefit, enabled the personal accident lines to enjoy robust growth. Nevertheless, the annual growth rate of personal accident insurance has steadily trended downward because of the market s saturated condition. In FY2007, Korean Re s gross and net premiums were up 13.0% and 12.5%, respectively, amounting to KRW565.8 billion and KRW404.1 billion. This notable performance was the result of an increase in facultative business and expanded retention of high-margin business areas. Despite a slowdown of growth rates and increased retention of general liability lines by primary insurers, the Company managed to realize gross premium of KRW224.8 billion, up 4.9% from a year earlier. Through selective underwriting and stringent risk management measures, the Company was able to realize a 6.3% gain in net income, amounting to KRW25.5 billion. 20

23 REVIEW OF OPERATIONS Gross Premiums for Casualty Growth13.0 % Although the loss ratio of liability insurance has widened somewhat to 52.1%, from 45.3%, a profit of KRW20.0 billion was attained in FY2007. Meanwhile, the loss ratio of bond reinsurance improved, contributing to a net income of KRW19.6 billion for this sector. In FY2007, because the personal accident lines recorded a deficit of KRW1.86 billion, the overall profit amount was nominal. However, the Company expects that the profit for casualty lines will increase by more than KRW5 billion in FY2008, as a result of the reduction of PA(Personal Accident) premium retention. In FY2008, due to the projected sluggishness of facility investment and domestic consumption, the casualty market can expect to see stagnant growth, including a downturn in the growth of personal accident coverage. Based on a strategy to develop new, innovative products and to capitalize on niche markets, Korean Re is targeting double-digit growth as well as notable profitability in FY2008. Breakdown of Gross Premiums Despite a slowdown of growth rates and increased retention of general liability lines by primary insurers, the Company managed to realize gross premium of KRW224.8 billion, up 4.9% from a year earlier. 12.3% Bonds 11.1% Others 39.8% Liability SUMMARY OF GROSS PREMIUMS (KRW in billions) Category Liability Workers Compensation Personal Accident Bond Others Total Note: Casualty Insurance includes liability, personal accident, and bond insurance, other than engineering and aviation insurance 33.8% Personal Accidents 3.0% Workers Compensation 21

24 REVIEW OF OPERATIONS Thanks to steady growth of the direct market and effective partnerships with prime insurers, Korean Re s long-term insurance sector enjoyed an outstanding performance. In FY2007, the Company s gross premiums for long-term reinsurance was up 9.4%, over the previous year, reaching KRW536.0 billion. Gross Premiums for Long-term Growth9.4 % Long-term In FY2007, Korea s long-term direct premiums swelled 19.0%, from a year earlier, to KRW17.1 trillion (including savings-type insurance), backed by steady sales growth of new distribution channels, including bancassurance and homeshopping networks. As a result, the market share of major insurance firms slipped to 65.9%, from 67.0%, while small and medium-sized insurers captured a 19.1% share, versus 18.2% in the previous year. Long-term insurance, which has shown consistent growth in recent years, accounted for the largest share of the non-life insurance market, at 52.2%, in the year under review. Thanks to steady growth of the direct market and effective partnerships with major insurers, Korean Re s long-term insurance sector enjoyed an outstanding performance. In FY2007, the Company s gross premiums for long-term reinsurance was up 9.4%, over the previous year, reaching KRW536.0 billion. This increase was fueled by steady growth of direct premiums that reflected the upward sales trend of new distribution channels. The net premiums for long-term reinsurance amounted to KRW527.2 billion in FY2007, which accounted for a 20.1% share of Korean Re s overall net premium income for the year. Moreover, the combined ratio of the Company s long-term insurance has been maintained at less than 99% for the past 5 years. This favorable outcome has been mainly attributed to its concerted efforts to optimize profitability and a prudent underwriting approach that seeks to avoid positions with undue risk. In FY2008, Korean Re will likely see the profitability of its long-term lines decline somewhat; however, the Company s long-term sector will remain profitable overall. 22

25 REVIEW OF OPERATIONS The Company s inward business volume has shown a downward trend in recent years, as a result of an increase in the retention shares of major insurers, due to a recent stabilization of the loss ratios for direct premiums. Overall, the growth rate for FY2008 is projected to be above that of the previous year, on the strength of accelerated development of new products and continued penetration of new markets. SUMMARY OF ANNUAL GROSS PREMIUMS (KRW in billions) Long-term Gross premiums Motor In FY2007, the gross premiums of the Korean primary motor insurance market was KRW10.31 trillion, marking a notable 11.8% growth from the previous year. The loss ratio of motor insurance also improved significantly to 72.7%, from 78.7% a year ago, while the operating loss of KRW417.2 billion represented a dramatic reduction of 46.5%. Amidst the noteworthy growth of online motor insurers in FY2007, Kyobo Auto Insurance was acquired by France s largest insurance firm, AXA, while a 65% stake of Daum Direct Auto Insurance is now held by the ERGO insurance group, a subsidiary of Munich Re Group. These takeovers are likely to have a growing impact on the domestic motor insurance market in the years ahead. Gross Premiums for Motor Growth18.7 % 23

26 REVIEW OF OPERATIONS The launch of motor insurance by the bancassurance sector, a bone of contention between the banking and insurance industries, has been delayed by the financial services commission, in consideration of strong objections from the nonlife insurance sector. Meanwhile, the launch of motor insurance by the bancassurance sector, a bone of contention between the banking and insurance industries, has been delayed by the financial services commission, in consideration of strong objections from the non-life insurance sector. Gross premium growth is expected to slump to about the 4% range in FY2008, primarily due to a slowdown in the number of new vehicles on the road and increase in consumers who switch to online auto insurers, which generally offer relatively lower premium rates. In FY2007, Korean Re posted KRW432.1 billion of gross premiums written up 18.7% over the previous year. The company has consistently contributed to the stability of insurers operating results by providing proportional and non-proportional reinsurance protection, as well as supporting the sustainable growth of our clients through the provision of hands-on technical training to upgrade their underwriting methodology. SUMMARY OF GROSS PREMIUMS (KRW in billions) Motor Gross premiums In FY2007, the gross premiums written of Korea s Life life insurance industry was up 13.0%, over the previous year, to KRW75 trillion, primarily due to a surge in the sales of variable annuity products, which had gained considerable popularity based on expectations of an upward trend of share prices. Another key factor behind the premium increase was steady growth of retirement coverage, in line with the rapid aging of Korea s population. However, sales of variable insurance products are expected to slow somewhat in FY2008, which will moderate the growth rate of the domestic life insurance market to 8.9%, a notable 3.9%-point decline from the previous year. 24

27 REVIEW OF OPERATIONS Of particular note, amendment of the Insurance Business Law, due to be implemented in early 2009, is likely to have a far-reaching impact on the domestic life insurance market. For example, the new provisions will serve to facilitate the consolidation of life insurers, expand their scope of operations, and diversify revenue sources. Moreover, the long-delayed liberalization of cross-sales transactions, under which an agent would be allowed to sell both life and non-life insurance products, is slated to take effect in the middle of This system is expected to create additional opportunities for major domestic and foreign insurers. The cash-flow pricing method, based on real-experience data, which is scheduled for adoption sometime after 2009, will contribute to an enhancement of the management transparency of the insurance industry. In addition, the listing of life insurers on the stock exchange will likely result in strengthening their financial structure through an inflow of capital, for an expansion of their risk profiles and implementation of the RBC (Risk-based capital) system. These developments will also serve to encourage the consolidation of life insurers, along with upgrading the transparency and integrity of management. Meanwhile, the 2008 launch of sales of personal MIPs (Medical Indemnity Products) will provide life insurers with a competitive boost. Gross Premiums for Life Growth9.0 % Korean Re s life reinsurance sector seeks to record continuous strong growth through the development of innovative life insurance products, expansion of its presence in the thriving cooperative insurance market, and advancement into new markets abroad. SUMMARY OF GROSS PREMIUMS (KRW in billions) Life Gross premiums

28 REVIEW OF OPERATIONS As for Korean Re, FY2007 was another year of outstanding results, with its gross premium written for life insurance amounting to KRW523.2 billion, a sharp 9.0% increase, year-on-year. In fact, the Company has enjoyed exceptional annual growth, of 7.2% on average, since FY2003. Korean Re s overseas business, which has maintained a doubledigit growth rate since 1996, recorded KRW534.3 billion of gross written premium in FY2007, representing a dramatic surge of 44.1%, from a year earlier. Korean Re s life reinsurance sector seeks to record continuous strong growth through the development of innovative life insurance products, expansion of its presence in the thriving cooperative insurance market, and advancement into new markets abroad. In particular, the Company strives to constantly enhance the soundness of its portfolio holdings by sharing its advanced underwriting techniques with clients. Korean Re s overseas business, which has Overseas Inward maintained a double-digit growth rate since 1996, recorded KRW534.3 billion of gross written premium in FY2007, representing a dramatic surge of 44.1%, from a year earlier. This impressive result was primarily attributed to the Company s region-specific marketing strategy, which included a sharp focus on the Middle East. Also worthy of note, the combined ratio from FY2003 to FY2007 stood at 95%, on average, thus confirming the effectiveness of the Company s dual pursuit of revenue growth and enhanced profitability. By region, the Asian region (51.8%) generated the lion s share of overall gross premiums in FY2007, followed by the Middle East and Africa (30.5%), and the European (13.5%) and American (4.2%) regions. During the year under review, the Middle East and Asia regions accounted for robust growth of gross premiums. In fact, the Company regards the resource-rich Middle East as a prime target market. This is evident from Korean Re s recent opening of a liaison office in Dubai, in April 2008, which will contribute to the creation of additional business opportunities in the region. 26

29 REVIEW OF OPERATIONS Moreover, premium growth of the Afro-Asian market swelled 64.9%, from the previous year, amounting to KRW439.7 billion. Business was brisk as well in Europe and Latin America, 2 other target regions, which enjoyed gains of 19.7% and 7.9%, respectively. By business category, property and engineering lines took up a dominant 64.6% share, along with recording KRW345.3 billion of gross written premium. The shares of marine and casualty lines stood at 12% and 8.7%, respectively, while motor insurance accounted for a 14.7% share. Reinsurance types included proportional (83.9%) and non-proportional (8.2%) treaties, along with facultative business (7.9%). While maintaining reliable and trustworthy business relations with partners in Asia, the Company is diligently striving to broaden and reinforce its business platforms in the Middle East, Latin America, and Eastern Europe. Korean Re intends to continue its concerted efforts to expand into highgrowth areas of the global market. While maintaining reliable and trustworthy business relations with partners in Asia, the Company is diligently striving to broaden and reinforce its business platforms in the Middle East, Latin America, and Eastern Europe. However, in light of an overall weakening of the global market s fundamentals, the Company s conservative and profit-focused underwriting emphasis will be all the more critical. In FY2008, Korean Re expects another solid year, in terms of revenue growth as well as profitability, as a result of the Company s active entry into new markets, prudent diversification of portfolio holdings, by class and region, and disciplined underwriting practices. SUMMARY OF GROSS PREMIUMS (KRW in billions) Overseas Inward Gross premiums

30 REVIEW OF OPERATIONS Risk Management Korean Re s risk management is focused on efforts to assure the stability of Company management as well as optimization of corporate value and operating profitability. In line with these goals, all the risks of Korean Re are strictly assessed, monitored, and managed in an efficient manner. Liquidity risk and credit risk are monitored by the Asset Liability Management (ALM) system and Credit Risk Management (CRM) system. The Company implements operational risk management procedures to effectively manage all risks. The Risk Management Committee, under the oversight of the Board of Directors, is the Company s highest decision-making body for risk management activities. It formulates risk-management policies and regulations, and determines risk-tolerance limits. Meanwhile, the Risk Management Team is responsible for daily operations and related administrative tasks. In addition, each business unit assesses, monitors, and reports on its assigned risks to the team. Korean Re manages the underwriting risk of insurance transactions through its Dynamic Financial Analysis (DFA) system. The Market VaR (Value-at-Risk) system is utilized to verify that working assets are being maintained within the position limits and the VaR limits on a daily basis, along with preparing for a worst-case scenario based on stress testing. Liquidity risk and credit risk are monitored by the Asset Liability Management (ALM) system and Credit Risk Management (CRM) system. The Company implements operational risk management procedures to effectively manage all risks of loss related to the entire spectrum of its business activities. When the Enterprise Risk Management (ERM) system, the final phase of the master plan to establish an advanced risk management system, is in place, Korean Re will have the ability to evaluate all related risks as a single cumulative amount. Management will thus be able to implement business strategies in full consideration of potential risk exposure, together with evaluating the risk-adjusted performance of each business unit. 28

31 REVIEW OF OPERATIONS Korean Re identifies and manages underwriting risk, investment risk, and other material risks based on its pre-decision making risk-assessment procedures, and also enhances risk management capability through the self-monitoring measures of each business unit and on-the-spot inspections by the Risk Management Team. Korean Re will continue to adopt advanced risk management systems and build up its risk management infrastructure in order to assure that the risk exposure of business operations is maintained at a prudent level. In doing so, the Company will be able to optimize its profit performance and sustainable growth. Investment During 2007, Korea s GDP recorded an estimated growth of 5.0%, from a year earlier, thanks to a notable gain of exports as well as a moderate recovery of domestic demand, led by private consumption and facility investment. Invested assets Growth11.1 % The domestic financial market, meanwhile, was largely characterized by rising interest rates, an upward trend of equity markets, and the Korean won s sharp depreciation against the US dollar. Long-term interest rates, including the yield on 3-year treasury bonds, rose by 0.34% point, primarily due to inflationary pressure resulting from record-high energy prices. Short-term interest rates also trended upward by 0.67% point. As of March 31, 2008, the yield on 3-year treasury bonds stood at 5.10%, and short-term interest rates at 5.77%. Amidst a heavy flow of funds into stock-type investment products, the socalled China-related shares have soared, which vaulted the KOSPI above the 2,000-point mark in However, inflation concerns due to ever-rising oil prices and apprehension over the sub-prime mortgage crisis combined to lower the KOSPI to the 1,700 range, since October

32 REVIEW OF OPERATIONS Despite the market adversity, in FY2007, Korean Re s invested assets were up 11.1%, over the previous year, to KRW2.15 trillion, buoyed by increases of cash flow and investment income. In FY2007, the value of the US dollar generally declined, in line with a global weakening of the dollar s strength. In Korea, however, due to concerns about a credit crunch because of the U.S. sub-prime mortgage crisis, the US dollar-korean won exchange rate rose sharply to 1,030 won/dollar, before settling at a 990-won/dollar level, in March Despite this market adversity, in FY2007, Korean Re s invested assets were up 11.1%, over the previous year, to KRW2.15 trillion, buoyed by increases of cash flow and investment income. Similar to the previous year, Korean Re s assets have been conservatively invested in FY2007, primarily involving high-quality bonds, which generated stable income despite the financial market s considerable volatility. Annual Trend of Yield (%) INVESTMENT RESULTS (KRW in billions) Category Invested assets 2, , ,722.5 Investment income Yield (%) 5.5% 4.8% 4.9% Low-risk assets accounted for an 84.0% share (KRW1.80 trillion) of total invested assets, in large part involving high-quality bonds, which included issues of the government and related agencies, as well as bluechip corporations. Stock holdings represented a nominal 3.5% share of invested assets, at the FY2007 year-end, as a result of their relatively higher market risk. Breakdown of Invested Assets 7.0% Foreign investment 9.9% Short-term funds 3.5% Stocks 5.6% Others 74.0% Bonds INVESTED ASSETS (KRW in billions) Category Bonds 1, , ,271.8 Stocks Short-term funds (including cash) Foreign investments Others (including real estate) Total 2, , ,722.5 In FY2007, total investment income surged 27.8% (KRW23.9 billion), year on year, to KRW110 billion. This impressive outcome was mainly attributed to the exceptional performances of fixed-income securities and overseas investment. 30

33 REVIEW OF OPERATIONS INVESTMENT INCOME (KRW in billions) Category Bonds Stocks Short term funds (including cash) Foreign investments Others (including real estate) Total Annual Trend of Investment Income (KRW in billions) Stock investment generated a gain of KRW6.2 billion, as a result of the Company s timely trading of undervalued blue-chip shares. This result was better than that in FY2006, but relative to the KOSPI s sharp ascent, the overall rate of return was somewhat lower, because of the limited amount of stock investment at the start of the fiscal year Meanwhile, fixed-income securities accounted for 70.5% of the overall investment income, amounting to KRW77.5 billion, up 23.6% from the previous year s KRW62.7 billion. This noteworthy improvement was realized by adjusting the maturities of bond holdings, in response to interest rate trends and the increased volume of fixed-income investment. Revenue from overseas investment amounted to KRW14.0 billion, a notable gain from the previous year, as the Company more closely matched its foreign-currency assets with the foreign-currency obligations related to its underwriting activities. Moreover, Korean Re curtailed the scale of its investment abroad, along with favoring the accumulation of stronger-value currencies. In FY2008, Korean Re will pursue a more refined asset management and investment strategy in an effort to optimize overall gains and contribute to the Company s improved financial soundness. 31

34 KOREAN RE IN THE MARKET Since the full liberalization of the domestic insurance industry in 1998, Korean Re has consistently recorded healthy profits and maintained a dominant share of Korea s reinsurance market. Korean Re in the Market Adjusted net income (KRW in billions) FY2007 proved to be a landmark year for Korea s insurance industry, in terms of premium volume and profitability. Of particular note, the nonlife sector recorded its best-ever results, driven by improved loss ratios and a 13.9% surge in premium growth. Moreover, this impressive performance helped to vault the share prices of reinsurance firms to historic highs on the stock market Korean Re, which maintains close working relations with primary insurers, also reported a robust 15.7% growth of gross premiums, amounting to KRW3.67 trillion, along with an adjusted net income of more than KRW100 billion, for the third consecutive year. Adjusted net income included an allocation of KRW62.8 billion to build up the catastrophe reserve. Although the Company recorded impressive results and paid out attractive dividends to shareholders (cash: 33%, stock: 2%), this performance paled in comparison to the remarkable results of domestic primary insurers, which enjoyed a stellar year, after several years of mediocrity. Since the full liberalization of the domestic insurance industry in 1998, Korean Re has consistently recorded healthy profits and maintained a dominant share of Korea s reinsurance market. This is the result of the Company s concerted efforts to enhance its product offerings and take advantage of new market opportunities. We also maintain an efficient reinsurance marketing system, along with possessing in-depth knowledge and understanding of relevant risks. 32

35 KOREAN RE IN THE MARKET As for client services, based on a systemized process that focuses on risk surveys, formulation of applicable terms and conditions, reasonable rate quotation, provision of reinsurance capacity, and timely loss adjustment Korean Re seeks to optimize the interests of the domestic insurance industry as well as policyholders. In this way, the Company strives to promote mutual interest through a win-win formula for its clients. Clearly, Korea s conventional reinsurance market is fast approaching a phase of curtailed growth potential, due to such factors as relocation of manufacturing facilities overseas, low birth rate, and overcrowded insurance market, amidst a low interest-rate environment of advanced economies. As such, Korean Re remains wholly committed to the development of specialized products and entry into new market niches, like cooperatives, by capitalizing on its technical expertise and accumulated experience in the insurance business. In particular, through the development of advanced products related to D&O (Directors and Officers Liability), CI (Critical Illness), and LTC (Longterm Care), Korean Re can provide a diverse range of protection for policyholders, while contributing to the stable growth of the primary insurance market by creating additional demand for insurance coverage. Korean Re can provide a diverse range of protection for policyholders, while contributing to the stable growth of the primary insurance market by creating additional demand for insurance coverage. Korean Re strives to expand its client base through multifaceted marketing activities, which include revamping of the definition and scope of customers. As a result, in addition to primary insurers, our customer base also encompasses cooperatives and policyholders. In response to an extremely challenging business environment, Korean Re will not dwell on it past achievements and market strategies, but instead aggressively pursue diverse business opportunities to secure a foundation for sustainable profitability. In line with this, the KoreanRe Investment Advisory Company was launched in April 2008, as a key step in our efforts to become an integrated financial services group. 33

36 KOREAN RE IN THE MARKET In contrast to the domestic-focused outlook of Korea s insurance industry, Korean Re has been doing business worldwide over the past decade, for which it has earned global recognition for its reinsurance capability related to the hull, cargo, and engineering sectors. As such, Korean Re has been credited for introducing the competitive advantages of Korea s insurance industry to the world s financial markets. The Korean Re Reinsurance Management Seminar, which has been annually presented for the past 27 years, is a highly regarded industry event that attracts the attendance of insurance specialists from Asia, Africa, Eastern Europe, and Central/South America. To strengthen its role of disseminating insurance-related information, Korean Re distributes regular publications to domestic clients, including Risk & Insurance and Insurance World, while serving as a bridge for foreign clients, by providing access to a wealth of information on Korea s insurance market through its Korean Re Bulletin journal. Of note, the Korean Re Reinsurance Management Seminar, which has been annually presented for the past 27 years, is a highly regarded industry event that attracts the attendance of insurance specialists from Asia, Africa, Eastern Europe, and Central/South America. Through a variety of research projects, as well as the hosting of various workshops, Korean Re provides full-spectrum reinsurance services, tailored to the particular needs of its clients, at home and abroad. Through such comprehensive client services, Korean Re has consolidated its leadership position in the Korean insurance market based on mutually beneficial relations with its partners and clients. While remaining on track to bolster its market leadership and sustainable growth, Korean Re strives to further reinforce its strategic alliances with top-tier reinsurance firms worldwide. 34

37 KOREAN INSURANCE MARKET ( ) The life and non-life insurance sectors in Korea enjoyed outstanding operating results in FY2007. The sectors reported a combined 13.3% growth of gross premiums written, from a year earlier. Korean Insurance Market By managing to avoid any major catastrophes that involved substantial losses, the life and non-life insurance sectors in Korea enjoyed outstanding operating results in FY2007. The sectors reported a combined 13.3% growth of gross premiums written, from a year earlier, amounting to KRW trillion in FY2007. Moreover, this enabled Korea s life and non-life insurers to record their best-ever performance, in terms of profitability. In FY2007, the non-life industry s growth was led by the long-term and motor insurance lines. The non-life insurance sector expanded 13.9%, year on year, resulting in KRW32.69 trillion of direct gross premiums. As for the life insurance sector, it recorded KRW75 trillion of gross premiums, representing a healthy increase of 13.0%, versus the previous year, thanks to a surge in demand for variable insurance products. Overall, the insurance market shares remained virtually unchanged, at about 69.7% for life insurance and 30.3% for non-life insurance, in FY2007. With the stock market s upward momentum boosting demand for variable life insurance, this fueled the growth of the entire life insurance sector; however, this stimulus is likely to diminish in FY2008, thereby dampening the sales growth of life insurance products, in general. In the non-life insurance sector, motor insurance is likely experience a growth slowdown as well. Nonetheless, this sector is forecast to record a healthy growth of about 10% in gross premiums written, for the fourth consecutive year, on the back of continued expansion of long-term lines. In FY2007, the non-life industry s growth was led by the long-term and motor insurance lines. The non-life insurance sector expanded 13.9%, year on year, resulting in KRW32.69 trillion of direct gross premiums. As for the life insurance sector, it recorded KRW75.1 trillion of gross premiums. 35

38 KOREAN INSURANCE MARKET INSURANCE MARKET VOLUME (KRW in billions) Category Gross Premium Written - Non-Life Insurance 32,692 28,694 24,957 - Life Insurance 75,096 66,455 61,460 Total 107,788 95,149 86,417 (Growth Rate, %) (13.3) (10.1) (13.0) Total Assets - Non-Life Insurance 65,793 56,971 49,407 - Life Insurance 305, , ,362 Total 371, , ,769 (Growth Rate, %) (12.4) (14.3) (13.2) Premiums to GDP (%) Notes: GDP, as of December 31, 2007 With the start date for the Capital Market Consolidation Act fast approaching, keen attention has been focused on mergers and acquisitions among medium-sized insurers. The Korean government, which had previously prevented insurance concerns from establishing a holding company structure, now believes that the insurance sector can serve as a strategic cornerstone of the domestic financial services industry. As the incumbent administration has indicated that it would support the efforts of insurers to create holding company organizations, M&A activity is likely to become a preferred strategy for business expansion, in regard to existing insurers as well as recent entrants. For example, Woori Finance Holdings and Aviva Life recently acquired LIG Life Insurance, as a joint investment, and launched Woori-Aviva Life Insurance Company. In addition, the Lotte Group, which ranks 5th among Korea s business conglomerates, acquired Daehan Fire & Marine Insurance Company. Accordingly, Korea s insurance industry can expect to see an acceleration of M&A deals over the near term. As of October 2007, the financial supervisory authorities revised regulations in order to reinforce the solvency margin standards. The regulations now impose a limit of 50% on the amount of insurance ceded to reinsurers, while those accounts that do not transfer risk will no longer be recognized as being backed by reinsurance policies. 36

39 KOREAN INSURANCE MARKET In addition, variable life insurance, which had previously been recognized as an investment, and therefore excluded from the determination of solvency margin requirements, must now be included when calculating the solvency margin. These regulation revisions have been adopted in advance of the upcoming RBC (Risk Based Capital) regulations, which are slated for implementation in April As a result of the more stringent regulations, the financial sector will be able to upgrade its international competitiveness through enhanced efficiency, but for certain insurers, which are not able to readily adapt to these changes in the market environment, the new regulatory framework could present a potential stumbling block. Combined Gross Premiums (KRW in billions) 86,417 95, , In FY2007, 22 life insurance firms 13 domestic Life and 9 foreign engaged in insurance-business Insurance operations in Korea. These insurers reported a noteworthy increase of 13.0%, in gross premiums written, due in large part to robust sales growth of annuity and investment products. Of particular note, gross premiums for variable insurance lines soared 50.9% to KRW17.4 trillion. By company, the so-called Big 3 life insurers Samsung, Korea, and Kyobo saw their combined market share shrink by 5.5% points, year on year, while accounting for a 56.8% share of the year s total premiums. In contrast, the shares of medium-sized and foreign insurers moved up 3.2% points and 2.3% points, respectively, buoyed by notable sales growth of variable insurance lines and steady advancement of bancassurance as a distribution channel. A total of 28 non-life insurance firms, including 7 Non-life reinsurers, conducted business activities in Korea Insurance in FY2007. For the year under review, the non-life insurance sector reported KRW1.7 trillion of net income, the highest-ever amount in the industry s history, thanks to a decline in the loss ratio of motor insurance and increased earnings from upgraded asset management. 37

40 KOREAN INSURANCE MARKET Twenty-one non-life insurance firms were in the black in FY2007. While the 4 leading non-life firms (Samsung, Hyundai, Dongbu, and LIG) saw their combined market share decline 1.1% points to 65.9%, mediumsized insurers reported a gain of 0.9% point in their market share to 19.1%, as a result of increased bancassurance sales of long-term insurance policies. Non-life Insurance Sector Growth9.7 % The non-life sector s outlook is relatively bright, with a forecast of continued strong growth of about 9.7% overall. The market ratio for life versus non-life is estimated at about 68.5% : 31.5%, which represents a 0.5% point decline for life insurance. At the start of 2008, it was forecast that Korea Outlook for would be able to achieve a real economic growth FY2008 rate of about 5% for the year. However, in the first half of 2008, Korea s domestic consumption has stagnated, while the current account deficit has widened, due primarily to the soaring prices of oil and raw materials. As a result, revised forecasts now project that real economic growth might end up closer to the 4% level. In addition, it is expected that the domestic financial services sector will suffer from wideranging volatility, due to such negative factors as after-shocks of the subprime mortgage crisis, restrictive monetary policy of the Chinese authorities, and global weakening of the US dollar. Accordingly, the insurance industry must address numerous challenges, including significant uncertainty about the domestic and global financial environment, along with possible industry restructuring in response to implementation of the Capital Market Consolidation Act. Moreover, efforts are required to address the new regulatory framework, which includes the reinforcement of solvency margin guidelines, enhancement of rate quotations, and the introduction of IFRS (International Financial Reporting Standards), in Above all, it is all the more imperative for insurers to noticeably bolster their expertise as effective risk managers, along with formulating a mid- to long-term strategy to upgrade the competitive advantages of the insurance industry overall. In FY2008, the insurance industry will likely experience slackened growth of life insurance, due to a slowdown in the sales of variable and accidental-death insurance. However, the non-life sector s outlook is relatively bright, with a forecast of continued strong growth of about 9.7% overall. The market ratio for life versus non-life is estimated at about 68.5% : 31.5%, which represents a 0.5% point decline for life insurance. 38

41 KOREAN INSURANCE MARKET In FY2008, gross premiums written for life insurance are expected to record 8.9% growth, despite an anticipated falloff in demand for variable life insurance. Profitability is likely to show a slight improvement, as a result of enhanced investment gains. As for the non-life sector, premiums of about KRW37.5 trillion is forecast for FY2008, based on steady growth for long-term insurance lines and a recovery for commercial insurance, while motor insurance is projected to surge 11.4%, year on year. The asset management yield is expected to remain stable, while overall net income should be quite similar to that in FY2007. LIFE INSURANCE MARKET (KRW in billions) For the years ended March Gross Premiums Written 75,096 66,455 61,460 Claims Paid 44,877 35,144 35,535 Working Assets 226, , ,098 Total Assets 305, , ,362 Policy Reserves 215, , ,918 NON-LIFE INSURANCE MARKET (KRW in billions) For the years ended March Gross Premiums Written 32,692 28,694 24,732 Earned Premiums 31,095 26,542 22,995 Incurred Losses 11,927 10,630 9,016 Underwriting Gain (216) (834) (489) Investment Gain 3,623 2,236 2,084 Net Income 1,665 1,076 1,208 Working Assets 53,289 46,078 40,373 Total Assets 65,793 56,971 49,100 Technical Reserves 47,225 40,490 34,538 39

42 KOREAN ECONOMY 2007 ( ) Driven by robust exports and overall improvement of private consumption and facility investment, GDP (gross domestic product) in 2007 recorded an estimated 5% growth rate, which is almost equal to the previous year s 5.1% growth, amounting to US$969.9 billion (provisional). Korean Economy 2007 GDP & Growth Rate The Korean economy recorded solid growth in 2007, thanks to a double digit increase of exports and steady improvement of private consumption. For the first time, Korea s per-capita income surpassed the US$20,000-mark, along with its trade volume topping US$700 billion GDP (US$ in billions) Growth Rate(%) Following contentious negotiations, Korea and the United States concluded a free trade agreement (FTA), as of April 2, 2007, which is expected to bolster the competitive edge of Korean exporters on an intermediate and long-term basis. If the trade accord is ratified by the legislatures of the two allies, it will open up a new chapter of Korea-U.S. trade and investment. From the time of President Lee Myung-bak s inauguration in February 2008, his administration has been actively promoting a business-friendly economic policy, which has led to cautious optimism that a rebound of business investment and private consumption might gain momentum, and thereby provide a cushion to withstand a worsening of the global economy. Although the Korean economy has generally avoided a direct hit from the global sub-prime mortgage crisis, there is no such escape from soaring oil prices, which have already topped US$140 per barrel, and the US dollar s sharp surge against the Korean won. Meanwhile, the Capital Market Consolidation Act, which the National Assembly approved in July 2007, and is slated for implementation in 2009, will undoubtedly have a far-reaching impact on the financial services industry. Of particular note, regulations on corporate investment 40

43 KOREAN ECONOMY 2007 will be dramatically liberalized, while investment protection mechanisms will be upgraded, thus contributing to a more attractive environment for business investment projects. Driven by robust exports and overall improvement of private consumption and facility investment, GDP in 2007 recorded an estimated 5% growth rate, which is almost equal to the previous year s 5.1% growth, amounting to US$969.9 billion (provisional). Exports of goods and services enjoyed a 14.1% surge, from a year ago, to US$371.5 billion, thus extending its streak of double-digit growth to a fifth consecutive year. Despite a moderate economic slowdown of advanced countries, continued economic expansion of emerging markets, like China, has generated robust demand for Korean export commodities. By item, while the shipment of semiconductors has experienced sluggish growth, most other products, including machinery, display panels, and ships, have been on the rise. In 2007, Korea s imports amounted to US$356.8 billion, while the annual growth rate of 15.3%, continued a downward trend, as compared to 18.4% in 2006 and 16.4% in However, imports of steel products and grains involved higher costs due to sharp price hikes in the international market. Expansion of domestic consumption also led to increases in the import of foreign motors and durable consumer products. The current account surplus inched downward to US$6.0 billion, from the previous year s US$6.1 billion, reflecting a slight reduction of the current account surplus for commodity trade and a burgeoning deficit of the service sector. Private consumption, a key driver of the Korean economy, showed signs of steady recovery, in advancing 4.7%, the same level as the previous year. This outcome resulted from continued expansion of real income, upward trend of share prices, and improved outlook for consumption. However, the pace of private consumption growth has flattened out, due mainly to an unfavorable labor market. Meanwhile, government spending was up 5.8%, year on year, as a result of expanded outlays for public welfare. 41

44 KOREAN ECONOMY 2007 Facility investment again managed to exceed the GDP growth rate in Facility investment in 2007 was up 7.6%, over the previous year, as a result of heavy investment in transport facilities, including ships and motormobiles. In 2006, facility investment recorded a 7.8% growth. Of note, investment in the construction sector in 2007 edged upward to 4.0%, from 3.6%, ending 2 consecutive years of declining growth. By industrial sector, the service sector expanded 4.8%, year on year. In particular, the banking and insurance sectors reported notable growth, boosted by stock market gains. However, growth of the manufacturing and construction sectors slumped, as compared to the previous year. KEY ECONOMIC INDICATORS National Accounts GDP (US$ billions) Growth Rate (%) Per Capita GNI (US$) 20,045 18,401 16,413 Balance of Payments (US$ in millions) Current Account 5,954 6,093 14,981 Goods and Services 29,409 27,905 32,683 Income 769 (534) (1,563) Current Transfers (3,649) (4,293) (2,482) Capital and Financial Account 6,232 17,972 4,757 Financial Account 8,622 21,098 7,097 Capital Account (2,390) (3,126) (2,340) Foreign Trade (US$ in millions) Exports 371, , ,419 Imports 356, , ,238 Note 1: Source - Ministry of Strategy and Finance 2: Figures for 2007, except for foreign trade, are provisional. Despite a generally unfavorable employment situation, the unemployment rate fell to 3.2%, from 3.5%, due to changing demographic characteristics, including a relatively limited participation in economic activity by younger Koreans. Wages rose 5.6% on average. 42

45 KOREAN ECONOMY 2007 The consumer price index (CPI) was up 2.5%, which was below the year s target, but somewhat higher than the previous year s 2.2%. Sharp hikes in oil and raw material prices were the main reasons behind the increase in CPI. As for the financial sector, market interest rates showed an upward trend, due in large part to expanded demand for mutual funds, as a result of the economic upturn and flow of funds into the stock market. Share prices reached record highs in 2007 as well. Exports & Imports (US$ in billions) The value of Korean won weakened from the start of 2007, reaching an exchange rate of Korean won per US dollar, on March 5, 2007, in response to a net outflow of foreign stock investment funds. However, the Korean won rebounded to won per US dollar, on October 31, 2007, on the back of several large-scale shipbuilding contracts clinched by domestic shipyards and a weakening of the US dollar. The US dollar strengthened against the Korean won in November due to an accelerated outflow of foreign stock investment funds. In contrast to the US dollar s downward trend versus major currencies, the value of Korean won has weakened against the American currency since the fourth quarter of This outcome has been attributed to a substantial deficit of the capital account, which resulted from a noticeable downturn of investment in Korea by domestic and foreign firms, along with a rapid outflow of funds from the domestic bourse. In early 2008, the current account deficit continued to widen, which contributed to a won-dollar exchange rate of 1,030 won/dollar as of May Exports Imports Outlook In 2008, the economy is expected to record growth of 4~5%, supported by a solid export performance and continued recovery of domestic consumption. However, it is true that the Korean economy s growth momentum remains vulnerable to the volatility of the financial markets worldwide, skyhigh oil prices, and subdued growth of the global economy. During the first quarter of 2008, economic growth was up a nominal 0.7%, from a year earlier, signaling that the economy s upturn of 2007 had lost its momentum. Surprisingly, exports showed sluggishness, while consumption and investment also weakened somewhat, weighing down economic growth. 43

46 2007 Korean Re Annual Report

47 Distinctive Culture of Korean Re 46 Key Events 48 Share Price of Korean Re 50 MD&A 52 A Commitment to Sustainability Korean Re intends to fully satisfy its obligations as a responsible corporate enterprise by generously sharing our economic gains with those in need, including farming households and lower-income individuals, while actively participating in community-minded endeavors.

48 DISTINCTIVE CULTURE OF KOREAN RE Distinctive Culture of Korean Re ( ) Korean Re boasts a distinctive corporate culture that instills a spirit of challenge and innovation among its employees, which enables the staff to confidently face up and overcome any difficulties that they might encounter. In addition, management eagerly supports the voluntary activities of company employees. On November 9, 2007, a special farmer s Reaching Out to market was open for business in the backyard Underprivileged area of the Korean Re s Head Office in central Individuals Seoul, which demonstrated the Company s efforts to extend assistance to the underprivileged persons of our society, including the farming community of a remote island. Since establishing a sisterhood relationship with the Ganghwa village in June 2005, the Company has actively sought to provide assistance to the village residents in various ways. In late 2007, along with 23 management officials and staff of Korean Re, CEO Jong-won Park distributed rice and everyday necessities to lowerincome households of Ehwa-dong, Jongno-gu, central Seoul. CEO Park noted We are here to encourage and share our gains with people who are often overlooked by mainstream society. In addition, on July 8, 2008, 17 members of the Korean Re staff took part in the Habitat for Humanity in Chuncheon of Gangwon province, helping to build houses for the less fortunate in the blistering sun. Korean Re has been active in Habitat for Humanity since A new recruit stated, Although we aren t as agile as experts in building houses, this was a great opportunity to think about corporate social involvement while working alongside my Korean Re colleagues. On December 13, 2007, about 20 Korean Re staff members went to Taean along the West Coast to help out with the clean-up activities of the worst-ever oil spill in the history of Korea. They laboriously worked to remove oil residue and restore the natural habitat of indigenous wildlife. 46

49 DISTINCTIVE CULTURE OF KOREAN RE In full force, Korean Re employees, including Mountain-Trekking CEO Jong-won Park participated in a rigorous Program to Bolster annual mountain-trekking program in Solidarity While toting heavily laden backpacks, 169 management officials and staff of Korean Re trekked the 43km trails along the slopes of Mt. Taebaek. The mountain-trekking program was launched in 2004 in order to instill a sense of teamwork and to promote physical fitness. Thus far, hundreds of company employees have trekked a total distance of 177km along the slopes of the Jiri, Deokyu, Sobaek, Sokni and Taebaek mountains, which are situated along the Baekdu Mountain Range. Korean Re s Unique Focus on Human Resource Development One of the core axes of Korean Re s corporate culture is its focus on human resources. Although Korean Re consists of just 247 employees, it is committed to investing in human resources to help those employees become global reinsurance experts. The first step begins with the new recruit selection process. After an intense interview session, applicants need to undergo outdoor tests, which include mountain-climbing, playing soccer, pitching a tent, and knowledge of etiquette. These unique recruiting tests are part of Korean Re s concerted efforts to foster a progressive culture, which highly values personnel who demonstrate creative thinking and proper manners. By selecting employees who fit the mold of this unique culture, Korean Re has been able to control its turnover ratio to a mere 5%, which is far lower than the industry average at 20~30%. After the new recruits enter the Company, a unique mentoring system is put into place, consisting of general and specialized formats. Under the specialized format, 6 directors serve as a mentor for the new employees focusing on the Company s management philosophy, corporate culture and vision, and long-term business strategies. After 2~3 years of service with the Company, the employees are given the opportunity to take part in overseas OJT programs as well as training at our overseas liaison offices. 47

50 KEY EVENTS Key Events Launch of Investment Consultancy To diversify its revenue sources, upgrade its asset management performance, and optimize profit results, on April 25, 2008, Korean Re established KoreanRe Investment Advisory Company, an investment consultancy subsidiary, for which Mr. Kim Jun-yon has been appointed as its CEO. This new venture reflects Korean Re s preparations to capitalize on new business opportunities that are expected to emerge upon the implementation of the Capital Market Consolidation Act in February The establishment of this investment advisory subsidiary is in line with the Global Korean Re vision, under which the Company intends to become a World-Class Reinsurer and to evolve into an integrated financial group by enhancing its asset management capability. The subsidiary s start-up capital of KRW3.0 billion was solely invested by Korean Re. Initially, its staff of 7 employees will focus on maximizing the investment gains of Korean Re s asset holdings. Korean Re s operating assets, which stood at KRW2.15 trillion as of March 31, 2008, up 13% from a year earlier, are projected to reach KRW3.12 trillion, by

51 KEY EVENTS On April 8, 2008, Korean Reinsurance Korean Re becomes first Korean insurer Company opened a liaison office in Dubai, to open a liaison UAE, becoming the first Korean insurer to office in the Middle open a representative office in the Middle East East. It is headed by General Manager Haseok Park. The prime objectives of the of Dubai Liaison Office are as follows: First, this office is a core component of Korean Re s overseas business strategy and corporate vision of becoming a world-class reinsurance enterprise. Through the Dubai Liaison Office, we seek to gather market information, along with forging cooperative relations with primary insurers in the UAE so as to contribute to the further development of the local insurance industry. In addition, this new hub in the Middle East will serve as stepping stone for our entry into the markets of India and Eastern Europe, and South America as well. Second, this office will allow us to carefully observe market developments in the fast-growing Middle East region, along with facilitating the Company s mid- to long-term plans to expand into such areas as India, Turkey, and northern Africa. Third, the Company will be positioned to fully support the business activities of Korean enterprises in the Middle East. In particular, we can provide reinsurance services to help minimize the related risks of Korean concerns doing business abroad. Currently, Korean Re maintains a locally incorporated firm in Hong Kong and a branch office in Singapore, along with liaison offices in Tokyo, London, New York, and Beijing, as well as Dubai. 49

52 SHARE PRICE OF KOREAN RE Share Price of Korean Re For the Korean stock market, 2007 proved to be a landmark year, with the KOSPI (Korea Stock Price Index) surpassing the 2,000-point mark for the first time. Despite the considerable volatility of global stock markets, and net selling of foreign investors in Korea, the Korean stock market has established a new resistance level, according to securities analysts. On December 28, the final trading day of 2007, the KOSPI closed at 1,897.13, up an impressive 32.3% from a year earlier. The KOSDAQ index realized a gain of 16.2%, year on year, to close at points. The KOSPI, which opened the 2007 year at 1,435.26, broke through the 1,500-level on April 9. Thereafter, it continued on an upward trend, exceeding the 2,000-point benchmark for the first time on July 25. It went on to peak at 2, on October 31, setting 51 new highs in The technology-heavy KOSDAQ soared to on July 12, from a low point of , on January 23. The combined market capitalization of the KOSPI and KOSDAQ swelled rapidly to some KRW1,140 trillion, on October 31, after surpassing the KRW800 trillion mark for the first time. However, the KOSPI plummeted points, on August 16, in response to concerns about the U.S. sub-prime mortgage crisis. The index hovered around the 1,900-level during the second half of 2007, as a reflection of the uncertainty of stock markets worldwide, due to the fallout from sub-prime mortgage losses, and a downturn of share prices in China. Equity funds were undoubtedly the driving force behind the sharp ascent of the stock market indices. As Korean consumers moved their saving-account funds into diverse financial products, the volume of equity funds ballooned to more than KRW114 trillion, more than double the KRW46 trillion of just a year ago. The number of fund accounts topped 20 million. 50