A.M. Best Affirms Rating for Tugu Insurance Co.

April 19, 2004

A.M. Best Co. has affirmed the B+ (Very Good) financial strength rating of Tugu Insurance Company Limited (Hong Kong, China). The rating outlook is stable.

The rating reflects the company’s prudent capitalization, diversified underwriting portfolio, strong liquidity and conservative investment strategy. Tugu Insurance is strongly capitalized with a low premium leverage ratio. The Best’s Capital Adequacy Ratio (BCAR), which measures capitalization on a risk-adjusted basis, shows an adequate solvency margin. The premium leverage ratio, at 0.41 times on a net basis in fiscal year 2002, reflects the company’s adequate capital position.

The company continued to diversify its underwriting portfolio. As for fiscal year 2002, more than 42% of total gross premium income was contributed from Hong Kong and other overseas businesses, which reflects the company’s strategy to diversify, reducing its reliance on group business emanating from Indonesia and its historical Indonesian-based captive exposure.

The company maintains a liquid and conservative investment portfolio. Of total assets at fiscal year-end 2002, approximately 36% were comprised of cash and time deposits while 13% included high quality bonds or managed funds. Most of the assets are denominated in USD and HKD which minimizes the currency exposure. With the conservative investment portfolio, Tugu Insurance has provided another stable income stream with sufficient liquidity.

Offsetting the positive factors are weak underwriting performance and intense competition in Hong Kong’s general insurance market, which will challenge Tugu’s growth prospects and ability to strengthen its business.

Furthermore, there is concern about Pertamina, the ultimate parent of Tugu Insurance, after its transformation into a limited liability company, in addition to its withdrawal from a decades-long Indonesian state-owned oil and gas monopoly.

The underwriting margin and operating ratio of the company have been considerably weakened due to substantial deterioration in its underwriting performance in recent years. With a declining market presence in Hong Kong’s general insurance sector, for the long-term, Tugu remains challenged to expand its market share and solidify its business position in the local market.

The exposure to country risk in Indonesia through the corporate group structure also remains considerable.

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