Best Affirms FSR for Dao Heng

November 17, 2005

A.M. Best Co. has affirmed the financial strength rating (FSR) of A- (Excellent) and assigned an issuer credit rating (ICR) of “a-” to Dao Heng Insurance Company Limited (DHI) (Hong Kong). The outlook on both ratings is stable.

The ratings reflect DHI’s solid risk-adjusted capitalisation, consistent underwriting performance and short-tailed risk exposure. The ratings also consider the company’s liquid and conservative investment strategy.

DHI maintains a liquid investment portfolio with cash accounting for approximately 58% of total assets. Equities and unit trusts represented only about 15% of total assets at the fiscal year end of 2005. The net dividend and interest income of DHI has increased to HKD 3.2 million (USD 0.4 million) in fiscal year 2005 from HKD 2.7 million (USD 0.3 million) in fiscal year 2004. A conservative investment strategy will continue to contribute to the company’s financial stability.

Despite softening premium rates and intense market competition in Hong Kong in recent years, DHI has been able to maintain profitability with a 5-year average combined ratio of 84%. The company primarily focuses on property damage and accident & health lines, which are generally short-tailed in nature. Consistently profitable underwriting results and stable investment returns have contributed positively to the net income of the company.

The Best’s Capital Adequacy Ratio, which measures the capitalization on a risk-adjusted basis, demonstrates that the company is adequately capitalized. DHI’s net premiums written was approximately 0.5 times of its capital and surplus in fiscal year 2005.

These positive rating attributes are partially offset by DHI’s deteriorating underwriting margin and its limited market presence.

Despite the continued improvement in its expense ratio, the company needs to further tighten its underwriting controls and enhance its distribution efficiency to achieve a higher level of underwriting margin.

As a result of DHI’s limited market presence, the company’s business volume only represents about 0.5% market share in the Hong Kong non-life market. Going forward, the company’s business growth over the mid to long term will depend on the company’s ability to strengthen its distribution capabilities.

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