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Management Discussion Analysis


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									FY2008 ANNUAL REPORT                                                                                                                                                                                                                     corporate overview

 Management’s Discussion & Analysis
 I. Forward Looking Statement                                                                                                       In the year 2009, implemented in line with the current solvency regulation, RBC (Risk Based Capital) and cash flow pric-
 The following discussion and analysis cover forward-looking data as well as the past performance. Depending on the var-            ing will come into effect. Because of these challenging changes, the importance of risk management and cost competitive
 ious factors, the actual results may differ materially from anticipated results made in this report. Forward-looking state-        power will be growing continually. Other regulatory changes include the recent deregulation of the industry brought by
 ments included herein are made as of the date hereof, and LIG Insurance undertakes no obligation to update publicly                the Insurance Business Act amendment that will likely produce new business opportunities.
 such statements to reflect subsequent events or circumstances.
 Korean insurance companies including LIG Insurance operate on a fiscal year basis. The fiscal year commences in April              In this environment, LIG management will make every effort to achieve strong sales growth as well as solid profits. In
 and ends in March of the following year. For reference, FY2008 in our discussion refers to the fiscal year ending March            FY2009, LIG will pursue strengthening competitive power of the sales force, expanding the market power in the auto
 2009. The terms ‘the company’, ‘the insurer’, and ‘LIG’ in this report all indicate the LIG Insurance Co., Ltd.                    business line, and raising brand value, in line with its sales strategy ‘Strengthening of market position through expanding
                                                                                                                                    customer base.’ Furthermore, it will raise the labor productivity in various ways, such as improving the sales force struc-
                                                                                                                                    ture and the claim adjustment compensation scheme.
 II. Overview
 Financial crisis, which was caused by the subprime mortgage delinquencies and foreclosures in the U.S. in 2008, has
 spread globally with adverse consequences such as fall in house prices and huge losses of financial institutions. Though           III. Results of Operations
 global financial crisis was eased through the conduct of monetary policies such as massive capital injections and interest         In FY2008, LIG Insurance posted KRW 4,590 billion of direct premiums written, up by 8.9% YoY. Looking into the de-
 rate cuts, the turnaround of the real economy is not yet assured. Korean economy, which relies heavily on exports, ac-             tails of the growth, Commercial insurance grew by 15.7% YoY, the economic slump and the stiff competition notwith-
 cordingly went through a difficult time. As it recorded negative growth, personal consumption and corporate investment             standing. LT insurance grew by 9.9% YoY, due to the increased sales contributed by the new sales channels. LIG’s auto
 stagnated. However, on the back of aggressive fiscal and monetary policies as well as various steps to boost consumption           line growth was limited to 3.0% owing to the drops in the new vehicle sales and the rate cut, but its market share was
 demand, the Korean stock market has recovered some of its losses and the property market has stabilized.                           slightly expanded. In terms of sales mix, while LT insurance business somewhat expanded, accounting for 60.6% of the
                                                                                                                                    LIG’s total written premium, auto insurance shrank to 25.2% from 26.6% in the previous year. Commercial insurance
 Global financial crisis has affected Korea’s financial industry in several ways. The domestic financial institutions have rec-     expanded further to 14.2%, up by 0.8%p a year ago. Overall, this change of sales mix well represents LIG’s growth strate-
 ognized losses on overseas securities and suffered huge losses during restructuring processes of construction firms and            gy through sustainable profitability. Overall, with reduction in auto loss ratio, continuous growth in LT line, and im-
 shipbuilders. In the year 2009, the Capital Market Consolidation Act finally took effect, but the positive effect created by       provement in cost efficiency, LIG achieved profit improvement amid generally unfavorable conditions for the asset man-
 the Act may not be able to offset the negative impacts of financial crisis and sagging economy. Banking industry has suf-          agement. However, LIG’s net profit shrank to KRW 117.3 billion, down by 5.9% YoY. The profit margin has fallen be-
 fered from deterioration of the profits caused by the loan market-related risk and low interest rate.                              cause of the decline in expense margin and low investment yields. In FY2009, net profit is forecast to increase, due to the
                                                                                                                                    improvements in the investment management and expense margin.
 Non-life insurers experienced profits decline due to the weakening in expense margin and return on investment, despite
 the continuous growth in the LT line and the improvement in the auto loss ratio. In FY2008, Korean non-life insurance                      *Trend of direct premium written                            *Trend of market share by business line
 industry wrote KRW 34.2 trillion of insurance policies with its written premium growth at 10.5% YoY, on the back of the                     (Unit: In billions of KRW)

 strong sales growth in LT line, but net profits fell 9.8% from the previous year.                                                                                                                          Long-term              14.7%


 LIG has strived for profitability improvement as well as expansion of its market position. Owing to the continuous im-                                                                                                            10.4%        10.6%
 provement of profitability, auto loss ratio stabilized significantly. Profitability of the LT insurance business has expanded
 as well, attributable to the conservative underwriting policy and low interest rate. In terms of market share in the LT busi-                                                                                                                  17.4%
                                                                                                                                                                                                           Commercial              16.6%
 ness line, LIG grew by strengthening its position in the new channel and by nurturing the traditional channels. Given the                                                                                               14.4%
 diversification of sales channels, the expense ratio surged due to the commission payment schemes. However, with the                                                                                            Total             13.4%        13.2%
 improvement of the cost structure, the expense ratio is likely to fall in the future. All in all, in FY2008, LIG’s direct premi-
 ums written grew to 8.9% YoY and it recorded KRW 117.3 billion of net profit, down by 5.9%p due to the decline in the                                               FY2006 FY2007 FY2008                                FY2006    FY2007      FY2008

 expense margin.

                                                                                                                                                                                                                                                    36_ 37
FY2008 ANNUAL REPORT                                                                                                                                                                                                                           corporate overview

         *Product breakdown by direct                   *Trend of net income                                                           *Summarized balance sheet                                                                              (Unit: In billions of KRW)
          premium written                                (Unit: In billions of KRW)

                                                                                                     124.7 137.6
                                                             Adjusted net income                                                                                                                               FY2006               FY2007                    FY2008
                                                             Net income                                                                Invested Assets                                                         4,863.8              5,878.2                    6,316.4

                                                                                                                                       Deferred Acquisition Cost                                                 450.8                528.7                      664.8
                                                                                                                                       Separate Accounts                                                         334.5                450.1                      546.2
                                                                                                                                       Total Assets                                                            6,138.9              7,306.3                    8,081.9
                         56.8%    60.0%   60.6%
                                                                                                                                       Policy Reserve                                                          4,655.2              5,401.5                    6,027.5
                                                                                                                                             Reserve for outstanding claims                                      441.9                474.9                      512.6
                                                                                                                                             Long term insurance premium reserve                               3,566.6              4,258.0                    4,818.5
                                                                                                                                             Unearned premium reserve                                            616.2                625.9                      649.0

                                                                                       10.1 24.1
                                  26.6%   25.2%                                                                                              Reserve for participating poilcyholders’ dividends                   19.4                 28.8                       36.5
                                                                                                                                             Excess participating poilcyholders’ dividends                        11.1                 14.1                       11.0
                         14.3%    13.4%   14.2%                                       FY2006 FY2007 FY2008                             Catastrophe Reserve                                                       347.9                360.8                      384.6
                                                                *Note: Adjusted net income-net income plus                             Total Liabilities                                                       5,749.0              6,740.0                    7,591.0
                             FY2006   FY2007   FY2008            increase of catastrophe
                                                                                                                                       Retained Earnings                                                         223.4                341.4                      431.7
                                                                                                                                       Equity Adjustments                                                         85.4                143.5                      -20.6
*Summarized income statement                                                                       (Unit: In billions of KRW)          Total Shareholders’ Equities                                              389.9                566.4                      490.9

                                                           FY2006                     FY2007                                 FY2008    Total Liabilites & Shareholders’ Equities                               6,138.9              7,306.3                    8,081.9

Direct Premium Written                                     3,924.7                     4,216.7                               4,590.1
Net Premium Written                                        3,333.0                     3,609.5                               3,945.4
Net Premium Earned                                         3,335.6                     3.601.6                               3,925.6
Losses                                                     2,789.1                     2,892.0                               3,020.9
                                                                                                                                       IV. Performance and Outlook by The Business Line
     Loss Ratio                                             83.6%                       80.3%                                 77.0%
Net Expenses                                                 807.4                         828.8                             1,043.5
                                                                                                                                       • Underwriting Performance
     Expenses Ratio                                         24.2%                       23.0%                                 26.6%
Underwriting Income                                         -274.9                      -132.2                                -162.6
                                                                                                                                       In FY2008, Korean non-life insurers suffered from sluggish operating results due to the increasing expenses and RG
     Combined Ratio                                        107.8%                      103.3%                                103.5%
                                                                                                                                       (Refund Guarantee) losses, although with the stabilization in the auto loss ratio and growth recovery in the LT line.
Investment Income                                            279.8                         298.0                              310.2
Net Increase in Catastrohpe Reserve
                                                                                                                                       Premium rate cut did not deter profit improvement in the auto line, because of the stabilization of car accident rates and
                                                               14.0                           12.9                              23.7
Ordinary Income                                                 9.7                        155.6                              133.8    stringent underwriting guidelines. The LT line’s sales surged, owing to the expansion of the GA channel, but at the same

Net Income                                                     10.1                        124.7                              117.3    time the common practice of paying upfront fees to GAs caused an increase in the expenses.
Adjusted Net Income                                            24.1                        137.6                              141.0    On the whole, LIG’s underwriting margin fell slightly. LIG recorded its combined ratio for FY2008 at 103.5%, up by
                                                                                                                                       0.2%p from the previous year. LIG enjoyed a significant improvement in its loss ratio for FY2008, which was down to
                                                                                                                                       77.0% from 80.3% a year ago, but the expense ratio went up by 3.6%p to 26.6%. Raising expenses was inevitable to gain
                                                                                                                                       bargaining power in the market channel, but in FY2009 the GA related expenses are likely to decrease through the balanc-
                                                                                                                                       ing of the proportions of different channels and by adjusting the commission payment schemes.

                                                                                                                                                                                                                                                             38_ 39
FY2008 ANNUAL REPORT                                                                                                                                                                                                                    corporate overview

        *Trend of combined ratio                                           *Underwriting income                                       *Direct premium written of                                    *Combined ratio of LT insurance
             Loss ratio                                                     (Unit: In billions of KRW)                                  LT insurance and growth (YoY)                                   Loss ratio
             Expense ratio                                                                                                             (Unit: In billions of KRW)                                       Expense ratio
                                  107.8% 103.3% 103.5%


                                                                                                 FY2006 FY2007 FY2008
                                                                                                                                                                                                                           105.9% 101.7% 104.4%

                                                                                                                                                                     44.5% 13.5% 9.9%






                                 FY2006 FY2007 FY2008

• Long-term Insurance                                                                                                                                               FY2006 FY2007 FY2008                                   FY2006 FY2007 FY2008

In FY2008, the industry’s LT insurance growth expanded by 16.3%, mainly due to the expansion of the business lines.           • Automobile Insurance
This solid growth can be attributed to the LT line expansion strategy and diversifying into in sales channels such GAs. LIG
posted KRW 2,782.2 billion of LT sales, up by 9.9% YoY, with its market share at 13.9%, down by 0.8%p. The market             In FY2008, auto insurance direct premium written in the industry grew to KRW 10.9 trillion, up by 1.3% YoY, as a result
share loss is mainly attributed to the LIG’s adherence to its sales strategy, which focuses more on the profitability im-     of the decline in the new vehicle sales and rate cut. For the same period, LIG wrote KRW 1,154.8 billion of auto insurance
provement than on the sales growth. The LT initial premium in FY2008 grew to 37.2%, exceeding the industry average of         polices, increased by 3.0% from the previous year, with the market share of 10.6%, up by 0.2%p YoY. LIG’s auto loss ra-
26.0%. Increasing sales through GAs while remaining competitive in the new channels market and nurturing of tradi-            tio, which had already been hovering over the industry peers, was sharply improved by 7.3% YoY to 69.1%. The industry-
tional channel all contributed to this solid growth. The market share in the LT initial premium was 14.1%, up by 1.2%p.       wide auto loss ratio has improved as well, due to the decline in driving frequencies caused by the increasing gasoline price.
                                                                                                                              But LIG made extra efforts to increase the proportion of lucrative products in its product portfolio by strengthening the
LIG also significantly improved its loss ratio, for LT insurance to 81.3%, improved by 2.6%p. This improvement in loss        underwriting guideline. As a result, LIG’s auto loss ratio was substantially improved vis-a-vis the competitors.
ratio was achieved by the sales strategy that focuses on risk-protection insurance, especially on the high-margin package
products that can maximize the profit. LIG managed to improve its risk premium loss ratio, the lowest level in the indus-     The industry’s auto insurance business environment will be challenging, as both slow vehicle sales and fierce competition
try, by 0.1%p YoY to 74.1%. Once again, the major contributing factor was a product mix shift toward risk-protection in-      are likely in the future. Samsung F&M’s online business launch will trigger market share changes for online players and
surance, particularly the high-margin package products that can maximize the profit.                                          intensified competition is to be expected due to the increasing proportion of cross selling channel.

In terms of the expense ratio in the LT insurance, LIG experienced a deterioration of the profit caused by the sales expan-   LIG will focus on expanding its market share by strengthening its competitive power in terms of channels. LIG will
sion strategy through add-in sales channels such as GAs, but the gradual improvement in the profit margin is likely to be     achieve its sales goal by strengthening internal channel, raising brand value and improving service. In addition, LIG will
achieved by balancing out the sales proportions of different channels.                                                        step up its efforts to improve profitability in the automobile insurance with stringent underwriting guideline and reason-
Demand for protection-type, such as the disease and accident LT insurance, is expected to grow constantly due to the ag-      able premium policy.
ing of the society and expansion of private health insurance. Thanks to the diversified sales forces such as add-in GA
channel and cross-selling, LT market’s size is likely to grow and the competition within it will increase accordingly. LIG
will achieve a meaningful growth in the sales channel market, by nurturing new sales agents constantly, strengthening
competitive power of traditional channels and maintaining the status of a leading player in the Bancassurance channel. In
addition, it will focus on risk management to make its sales profitable.

                                                                                                                                                                                                                                                     40_ 41
FY2008 ANNUAL REPORT                                                                                                                                                                                                                    corporate overview

        *Direct premium written of automobile                         *Combined ratio of automobile insurance                         *Direct premium written of commercial                       *Combined ratio of commercial insurance
          insurance and growth (YoY)                                      Loss ratio                                                    insurance and growth (YoY)                                     Loss ratio
         (Unit: In billions of KRW)                                       Expense ratio                                                 (Unit: In billions of KRW)                                     Expense ratio
              YoY                                                                                                                            YoY
              DPW                                                                           117.6% 110.3% 104.8%                             DPW
                                      12.5% -1.2%           3.0%                                                                                                                                                              82.1% 86.3% 89.0%
                                                                                                                                                                      6.2%    0.8%    15.7%








                                      FY2006 FY2007 FY2008                                   FY2006 FY2007 FY2008                                                    FY2006 FY2007 FY2008                                     FY2006 FY2007 FY2008

• Commercial Insurance                                                                                                        • Investment Performance

FY2008 was another tough year for commercial insurers in Korea. The competition in the commercial insurance line in-          In FY2008, Korean non-life insurers experienced difficulties in investment management. The yields from interest bearing
tensified, while the downward pressure on premium rates continued. In FY2008, LIG’s premium volume in commercial              assets was down compared from previous years, owing to the overseas securities losses caused by global financial market
line increased to KRW 653.2 billion, up by 15.7% YoY, with its market share at 17.3%, up by 0.6%p from the previous           downturn. The return from the equity investment was low as well. Global financial crisis has been defused, but uncertain-
year. Property line ended up growing only to KRW 254.9 billion, up by 3.7% from the previous year, due to fierce compe-       ties over the situation still remain. Korean non-life insurers have recognized derivatives losses but the possibility of addi-
tition and economic downturn. The loss ratio was improved to 40.1%, down by 5.4%p. Marine line grew to KRW 95.2               tional reductions remain. Like the case of its industry peers, LIG recognized its overseas securities loss in FY2008, and the
billion, up by 18.7% YoY, by hull insurance’s earnings contributions, but the loss ratio increased to 129.8%, up by 45.7%,    possibility of further reduction loss cannot be ruled out in FY2009. However, the loss is expected to be limited as the U.S.
attributable to RG losses and the weak won. Casualty line grew to KRW 262.4 billion, up by 25.3% from the previous year,      financial market has been regaining stability.
and the loss ratio increased to 68.3%, up by 5.0%p compared with the previous year.
                                                                                                                              LIG’s invested assets grew to KRW 6,316.4 billion, up by 7.5% from the previous year. In terms of portfolio, LIG lowered
All in all, LIG posted its total loss ratio in the commercial insurance business for FY2008 at 64.5%, up by 5.2%p YoY. The    the proportion of bonds and equities, but increased the proportion of cash and deposit. LIG cut back its proportion of
deterioration of the loss ratio was attributable to RG losses and the weak won. On the other hand, expense ratio in the       overseas securities. LIG management will increase the proportion of policy loans and mortgage loans in order to cope
commercial line improved by 2.5%p, thanks to carrying out reinsurance scheme in optimum level. In total, combined ra-         with the low yields from interest bearing assets, attributable to the low interest rates trend. Furthermore, the company has
tio was recorded at 89.0%.                                                                                                    maintained its investment strategy that focuses on risk management.

Looking ahead to FY2009, the sales growth of the commercial insurance line is forecast to slow, due to the global eco-        Although its yield fell, LIG’s overall return from the equity investment remains at the double-digit level, resulting from
nomic downturn and downward pressure on the premium rates. In order to prepare for such unfavorable conditions,               the sales of stakes in LIG life insurance. As the monetary policy response to the economic downturn has lowered the in-
LIG will try to expand its sales growth by an active support to its sales force and development of market-leading products.   terest rates, the yields from interest bearing asset are low. The return from loans has a downward trend, attributed to the
In addition, LIG will endeavor to maximize its profitability by underwriting policy in more optimal and strategic man-        low interest rate and intensified competition. Amid these changes in the market, LIG reported its FY2008 investment
ners, proper risk management, and by carrying out a reinsurance scheme.                                                       yield at 6.0%, which is down by 0.7%p from the previous year but still stayed at a relatively high level compared with the
                                                                                                                              rest of the industry. Invested assets grew by 7.5% YoY. All things considered, LIG’s investment profit grew to KRW 310.2
                                                                                                                              billion, up by 4.1%p YoY.

                                                                                                                                                                                                                                                        42_ 43
FY2008 ANNUAL REPORT                                                                                                                                                                                                                                        corporate overview

In FY2009, uncertainties over the state of global financial markets will likely remain. Although there are some indications
that the global economy is on the road to recovery, the real economic growth is still not assured. The interest rates show
an upward movement, but controlling risks of the rising interest rate is a concern. In order to prepare for these uncer-             *Trend of solvency margin ratio
                                                                                                                                       (Unit: In billions of KRW)
tainties, LIG will focus on the credit risk management as well as on management of the interest rate volatility. At the same          �Solvency                                                   �Solvency                                �Solvency
                                                                                                                                                    margin requirement                                        margin                                    ratio
time, LIG will pursue the efficient asset management and the future profit creation. In other to attain this goal, LIG will

maintain the proportion of interest-bearing assets on the current level and decrease the proportion of overseas bonds in

its investment portfolio. Furthermore, it will apply more stringent guideline for credit investment as well as project fi-

nancing in preparation for a real estate market contraction. Finally, alternative investments will also be considered to

achieve greater portfolio diversification.


*Trend of investment income
 (Unit: In billions of KRW)
�Invested                                      �Investment                                     �Investment
             assets                                          portfolio                                       income
                                                 Cash & Deposits                                                                                       FY2006 FY2007 FY2008                                     FY2006 FY2007 FY2008                  FY2006 FY2007 FY2008


                                                 Bonds            4.5%    5.0%    6.6%
                                                 Equities                41.6%

                                                                 39.5%           43.6%
                                                 Real Estate                                                                         • Asset Soundness


                                                               34.8%                                                                 Despite the increased proportion of loan book among the invested assets, LIG has shown a major improvement in the as-
                                                                                 31.2%                                               pect of asset quality. This can be attributed to the more stringent risk management that reflected the importance of asset
                                                                                                                                     management. Despite the slowdown of Korean economy, LIG’s NPL ratio as of March 2009 was 1.5%, remaining at the
                                                               10.0%     12.0%                                                       same level from the previous year. The level of loan risk has remained the same because of the real estate market contrac-
                                                               11.1%              9.4%
                                                                         9.2%                                                        tion and economic slowdown in domestic market. In order to prepare for unfavorable conditions extending into the fu-
              FY2006 FY2007 FY2008                                  FY2006   FY2007   FY2008            FY2006 FY2007 FY2008         ture, LIG will adopt a more conservative style on PF(project financing) as well as stringent monitoring of the loan quality.

• Capital Adequacy                                                                                                                            *Trend of total loans                                                              *NPL ratio

                                                                                                                                                (Unit: In billions of KRW)

LIG’s solvency ratio decreased to 193.6%, as of March 2009, from 221.9% a year ago. The decline in the solvency ratio was

due to the increase in company’s solvency margin requirement by 8.0% and a decrease in the solvency margin by 5.7%.                                                                                                                                  1.5%   1.5%

The reduced solvency margin was caused by the changes in valuations of available for sale securities and increased trea-
sury stock rather than by earnings decline.

LIG’s shareholders’ equity as of March 2009 stood at KRW 490.9 billion, decreased by 13.3%. Though the catastrophe re-                                            FY2006 FY2007 FY2008                                                     FY2006 FY2007 FY2008

serve increased 6.6%, adjusted shareholders’ equity (=shareholders' equity plus catastrophe reserve) decreased to KRW
927.3 billion, down by 5.6%. LIG has enough capital base compared with the minimum required solvency ratio of 100%
by Financial Supervisory Service (FSS). This implies that LIG has around 194% of extra available capital, which is set aside
for covering unexpected claims and protecting its policy holders.

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