Best Affirms FSR of Hang Seng Insurance Co. Ltd.; Outlook is Stable

March 16, 2006

A.M. Best Co. has affirmed the financial strength rating of A+ (Superior) and assigned an issuer credit rating of “aa-” to Hang Seng Insurance Company Limited (Hang Seng Insurance) (Hong Kong). The outlook for both ratings is stable.

The ratings reflect the company’s strong risk-adjusted capitalization, stable underwriting result and relatively liquid investment portfolio. The ratings also recognize the company’s diversified business profile and distribution support from its bank parent, Hang Seng Bank.

Best’s Capital Adequacy Ratio (BCAR), which measures capitalization on a risk-adjusted basis, demonstrates that Hang Seng Insurance’s capitalization remains strong. Its net premium leverage ratio was maintained at a conservative level of 0.6 times in 2004.

Hang Seng Insurance has maintained a consistent underwriting performance. The combined ratio averaged 79% over the past five years. Despite the deterioration in claims experience within the industry, the company’s loss ratio remained relatively low at 32.5% in 2004. Hang Seng Insurance benefits from the continued parental support of its bancassurance channel with Hang Seng Bank, generating 82% of the premium income as of September 2005.

The company maintained its liquidity, with 64.5% of its total assets invested in bonds, cash and short-term deposits as of September 2005. Hang Seng Insurance had reduced its equities investments from 70% to 14.4% of its total assets during 2001 to 2004, which has limited the exposure of its earnings to potential volatility.

Offsetting factors include the company’s weaker underwriting margin and limited growth potential within the competitive non-life insurance industry in Hong Kong.

Hang Seng Insurance’s underwriting margin moderately declined in 2004. However, its underwriting margin as of September 2005 improved compared to the same period in 2004. Increasing price competition within Hong Kong’s non-life insurance industry is expected to continue in 2006. Given that the local insurance market is highly fragmented and the company’s expense ratio is relatively high, Hang Seng Insurance’s overall underwriting margin and its potential growth would be further undermined going forward.

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