S&P Affirms ‘BBB’ Rating on South China Insurance Co.

June 9, 2005

Standard & Poor’s Ratings Services announced that it has affirmed its “BBB” long-term insurer financial strength and counterparty credit ratings on Taiwan’s South China Insurance Co. Ltd. with a stable outlook.

“The ratings reflect the company’s consistently satisfactory operating performance, good liquidity, and strong capitalization,” stated S&P credit analyst Susan Chu. “These strengths are partly offset by the company’s relatively modest market position in a competitive and liberalizing market,” she added.

S&P also noted that the ratings “reflect the shared credit profile of the company’s parent, Hua Nan Financial Holding Co. Ltd. (Hua Nan FHC). Nevertheless, some of South China Insurance’s credit characteristics appear stronger than those of the Hua Nan FHC group and its core operating subsidiary, Hua Nan Commercial Bank Ltd. (BBBpi/–/–).

“South China Insurance is a short-tail general insurer with a 4 percent share in terms of gross premiums in 2004, ranking 12th largest among Taiwan’s 23 general insurers. The company focuses on personal lines of insurance. Auto insurance represented 52 percent of its gross premiums in 2004, fire insurance 13 percent (or 19 percent if riders of natural peril risks are included), and consumer credits 11 percent. About 60 percent of its business is generated through direct or group distribution channels.”

S&P also indicated that company benefits from “good underwriting control.” It reported a five-year (2000-2004) average combined ratio of 94 percent, “which was better than the industry average of about 98 percent. Its return on revenue is also good, averaging 11 percent during the 2000-2004 period and 20 percent in 2004.

“Because of the short-tail nature of its business, South China Insurance’s capitalization is strong relative to its risks written, in the context of adequate reserving practices and good reinsurance protection. The company’s solvency ratio (reported capital to net premiums) stood at 94 percent at the end of 2004.

“South China Insurance’s investments are liquid and of good quality. About 70 percent of its invested assets are in cash or fixed income assets. South China Insurance became a wholly owned subsidiary of Hua Nan FHC in August 2003. Group members, mainly Hua Nan Commercial Bank Ltd., accounted for about 7 percent of the insurer’s gross premiums in the first quarter of 2005, compared with 5 percent in 2004 and 2 percent in 2003.”

S&P concluded that “although South China Insurance continues to operate as a stand-alone subsidiary, its integration with other group members, in terms of distribution channels and leveraging group resources, is expected to improve over the medium term. “

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