Best Affirms HK’s Dao Heng Ratings

January 3, 2007

A.M. Best Co. has affirmed the financial strength rating of “A-” (Excellent) and the issuer credit rating of “a-” of Hong Kong-based Dao Heng Insurance Company Limited (DHI) with a stable outlook.

“The ratings reflect DHI’s consistent underwriting performance, solid capitalization and short-tail risk exposure,” said Best. “The ratings also recognize the company’s conservative investment strategy.

“DHI has consistently achieved positive profitability with an average combined ratio of 85 percent over the past five years. The company has maintained a liquid investment portfolio with cash and cash equivalents accounting for 51 percent of its total assets at the end of fiscal year 2006. Given the short-tail nature of DHI’s primary business, the conservative investment strategy will continue to provide strong liquidity for the company’s business portfolio, contributing positively to the company’s operating performance.”

Best also noted: “DHI’s capitalization remained solid in fiscal year 2006. The company’s capital and surplus increased to HKD 147 million ($19 million) in fiscal year 2006 from HKD 136 million ($17 million) in fiscal year 2005. Best’s Capital Adequacy Ratio (BCAR), which measures capitalization on a risk-adjusted basis, also demonstrates that DHI is adequately capitalized.”

However the rating agency indicated that “DHI’s limited distribution capability and its continued reduction in underwriting profitability” are offsetting factors. “DHI’s underwriting margin trended downward over the past five years, although it is still favorable relative to the industry average.”

Best explained that the Company “primarily relies on its call center, which was built after the loss of the bancassurance channel, as its key distribution platform for the company’s personal line products. Due to its limited market visibility, the challenge remains for DHI to secure a stronger market profile in the local non-life sector.

“DHI experienced an average of 3.5 percent decline in its premium growth on a gross basis over the last five years, although it still captured approximately a 0.5 percent share of the Hong Kong general insurance market in 2005. Prospectively, DHI’s rating stability will be subject to its ability to strengthen its business position in Hong Kong over the mid to long term.”

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