A.M. Best Co. announced that it has affirmed the financial strength rating of A- (Excellent) of Hong Kong’s Sun Hung Kai Properties Insurance Limited (SHKPI) with a stable outlook.
“The rating reflects SHKPI’s consistent operating performance, low level of net underwriting leverage, continued growth of capitalization, high level of cash holdings and adequate reserves,” said Best. “The rating also recognizes the strong distribution support derived from its parent and affiliates.”
Best noted: “SHKPI maintained consistent operating profitability with continuous improvement in its underwriting margin in 2004, notwithstanding softening rates in the general liability market in Hong Kong. SHKPI achieved better claims experience in 2004 by reducing its loss ratio to 82.5 percent from 105.1 percent in 2003, greatly offsetting the negative impact of the significant reduction in net commission income.
“Cash and fixed deposits represented about 44.7 percent of SHKPI’s total assets as at the end of fiscal year 2004, enabling the company to generate a stable investment yield in a rising interest environment. Stable investment earnings, coupled with better underwriting results, led to an increase in the company’s adjusted return on equity to 27.6 percent in 2004.”
The rating agency also pointed out that “SHKPI’s adjusted capital and surplus on an absolute basis grew by 12.9 percent as a result of a higher level of retained earnings in fiscal year 2004. Its net premium leverage ratio stood at 0.62 times, which was considered low relative to that of its peers. Going forward, SHKPI, as a wholly owned subsidiary of Sun Hung Kai Properties Limited, will continue to benefit from operational synergies in business generation through internal referrals from the leading property development conglomerate in Hong Kong.”
Offsetting factors, cited by Best, “include increased investment in privately-held equities, small market presence, a high concentration of business risk and continued softening in premium rates.
“SHKPI significantly increased its exposure to private equities by investing in two newly established insurers in China in 2004. These investments exacerbated SHKPI’s liquidity position and risk-adjusted capitalization as measured by the Best’s Capital Adequacy Ratio (BCAR). Nevertheless, the company’s overall liquidity remains satisfactory, and the BCAR still indicates an adequate solvency margin.
“SHKPI’s underwriting portfolio represented about 1.3 percent of the total share of the fragmented general insurance market in Hong Kong. The company primarily focuses its business on the general liability class, which accounted for more than 75 percent of the company’s gross written premiums in 2004.
“Prospectively, high concentration of business and the continued softening premium prices in the competitive general liability market could translate into higher volatility for SHKPI’s underwriting profitability in the near term.”
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