A.M. Best Affirms Rating for Sun Hung Kai Properties Insurance Ltd.

March 17, 2004

A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) of Sun Hung Kai Properties Insurance Limited (SHKPI) (Hong Kong). The outlook is stable.

The rating reflects SHKPI’s satisfactory capitalization, strong liquidity, prudent reserving and continuous improvement in underwriting results. Hardening of the general insurance market and significant growth in the general liability line of business also contribute favorably to the rating.

SHKPI has maintained a low net premium leverage ratio at 0.59 times on its non-life portfolio as of fiscal year 2003. The Best’s Capital Adequacy Ratio (BCAR), which measures capitalization on a risk-adjusted basis, demonstrates the existence of an adequate solvency margin. With the unrealized loss of HKD 16 million (USD 2.1 million) and dividend payout of HKD 25 million (USD 3.2 million), the adjusted capital and surplus still recorded an increase of 1.9 percent in fiscal year 2003.

SHKPI has consistently achieved satisfactory improvement in its underwriting performance since fiscal year 2000. While the company’s loss ratio remained high, its combined ratio had been lowered to approximately 70 percent in fiscal year 2003. Despite the decline in investment earnings and the unrealized loss derived from the revaluation of property investment, the company’s net profit after tax for fiscal year 2003 still increased by 12 percent to HKD 44.9 million (USD 5.8 million).

As part of the Sun Hung Kai Properties Limited, SHKPI benefits from operational synergies. Through internal referrals from the group, SHKPI is able to derive significant business, particularly in the line of general liability and property damage, with minimum costs. In terms of gross premium written, about one third of the company’s business was generated through internal sources in 2003.

Offsetting factors include the aggressive investment policy, small market presence and concentration of business risk. As of June 30, 2003, SHKPI’s direct investment in property assets accounted for about 11 percent of its total assets, which often leads to volatility in profit and capitalization position for the company. Its further investment in private equities may likely erode the liquidity of the company, although cash holdings represent a significant portion (about 50 percent) of the company’s total assets.

As of the fiscal year-end 2002, SHKPI accounted only for approximately 1.9 percent of the total share of the fragmental general insurance market in Hong Kong. In addition, general liability accounted for more than 73 percent of total gross premium written. Decreasing the concentration of business in the general liability line will reduce the volatility of SHKPI’s underwriting results.

However, with its small market presence and the competitive nature of the Hong Kong general insurance market, SHKPI remains challenged to diversify away from group-related business in the long term.

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