Best Assigns ‘A-‘ Ratings to South China Insurance Co.

February 1, 2007

A.M. Best Co. has assigned a financial strength rating of “A-” (Excellent) and an issuer credit rating of “a-” to Taiwan’s South China Insurance Company Limited with a stable outlook.

“The ratings reflect South China’s consistent overall operating results, strong liquidity and adequate capitalization,” said Best. “The ratings also acknowledge the company’s extensive distribution network and operational synergies in business generation through its affiliates under the umbrella of Hua Nan Financial Holdings.”

Best explained that South China is a Taiwan-based insurer primarily concentrating on the personal automobile vehicle market. It “maintains a solid business profile through the establishment of seven branches and 28 representative offices throughout Taiwan. Following the acquisition of South China by Hua Nan Financial Holdings, South China is capable of further leveraging the extensive branch outlets of Hua Nan Commercial Bank.”

Best said, “going forward,” it “believes that South China will sustain its growth momentum through further integration within Hua Nan Financial Holdings despite the recent market stagnancy.”

Best noted: “South China experienced consistent improvement in underwriting performance over the past five years. The company managed to produce favorable claims experience, leading to a reduction in its net loss ratio from 67.1 percent in 2001 to 47.2 percent in 2005. The average loss ratio for the past five years was approximately 54 percent, which was lower than the industry average of 59 percent for the same period.

“South China maintains a high liquidity position with regard to the risks underwritten. Cash and high quality fixed income securities accounted for more than 50 percent of the company’s total assets as at September 30, 2006. Consistent yields from its conservative investment portfolio contributed positively to South China’s overall operating results over the last five years, notwithstanding the prevailing low interest rate environment in Taiwan.

“In line with the statutory reserving requirement, South China has built up a significant amount of special reserves to absorb potential claim costs arising from severe catastrophic events. The amount of special reserves represented about 95 percent of the company’s capital and surplus as at the end of the third quarter of 2006.”

However, Best indicated that “increasing capitalization pressure due to strong business growth and slower rate of surplus expansion,” should be taken into account as offsetting factors. “The ratings also consider the prevailing soft market environment, South China’s exposure to catastrophic perils and strong market competition.”

“Significant net premium growth and slower rate of increase in surplus due to a large dividend payout exacerbated the company’s risk-adjusted capitalization in 2005, as measured by Best Capital Adequacy Ratio (BCAR), although it remained adequate to support the assigned ratings. Relative to some of its peers, South China has a strong statutory risk-based capitalization ratio. Going forward, retention of earnings is crucial for South China’s business growth.

“Increased market competition due to the entry of foreign insurers with significant financial resources and the persistency of softening in rates as a result of the absence of severe catastrophic losses in recent years could possibly translate into underwriting volatility for South China. In addition, A.M. Best remains cautious about South China’s catastrophic risk exposure even though the company is well protected by its extensive reinsurance program.”

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