Best Affirms Hang Seng ‘A+’ Rating

May 16, 2005

A.M. Best Co. announced that it has affirmed the financial strength rating of “A+” (Superior) of Hong Kong’s Hang Seng Insurance Company Limited with a stable outlook.

“The rating reflects the company’s improved risk-adjusted capitalization, consistent underwriting performance and sound investment portfolio,” said Best. “The rating also takes into consideration Hang Seng Insurance’s ongoing strategic alliance with its parent, Hang Seng Bank.

“Hang Seng Insurance has demonstrated stronger risk-adjusted capitalization over the last fiscal year. This is supported by the improvement in its local solvency ratio and its net insurance leverage ratio. The local solvency ratio has improved to 393.9 percent as of September 2004 from 369.2 percent in fiscal year 2003,” Best’s report continued. “The net insurance leverage ratio decreased to 0.43 times as of September 2004 from 0.62 times in fiscal year 2003. The Best’s Capital Adequacy Ratio (BCAR), which measures capitalization on a risk-adjusted basis, indicates a similar, positive trend in its financial strength position.

“Hang Seng Insurance’s underwriting performance has remained consistently profitable over the last five years. Its average combined ratio over the same period stood at 79.2 percent, and its loss ratio was maintained at 30 percent. This position is significantly better than the industry as a whole. The company’s policy of focusing on profitability while underwriting risk has generated stable streams of underwriting income.”

Best also noted: “Hang Seng Insurance’s invested assets are relatively liquid as compared to some of its peers since the portfolios did not include a heavy concentration in equity investments in fiscal year 2003. As of September 2004, bank deposits (43.2 percent of invested assets) and bonds (40.8 percent) constitute the largest asset classes, followed by listed shares (8.0 percent) and unit trusts (7.6 percent).

“The strategic alliance with Hang Seng Bank continues to be the core distribution channel for Hang Seng Insurance. As of September 2004, more than 83 percent of net premiums written were generated from Hang Seng Bank’s branches within the market place. This arrangement provides the company with a competitive advantage over other non-bank related insurance companies.”

The rating agency, however, cited the “deteriorated market position in the core business line, limited growth associated to small market presence, aggressive dividend policy and the increasing price competition with the local insurance market,” as offsetting factors

Best concluded that the “relatively small market presence and deteriorated market position are expected to limit Hang Seng Insurance’s future potential growth within the competitive market in Hong Kong. Furthermore, the trend of increasing price competition would further reduce the company’s underwriting margin. This trend, coupled with a high dividend payout, is expected to limit the capital growth of the company going forward.”

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