Best Affirms ‘A-‘ Rating of Pacific Century Insurance

December 12, 2003

A.M. Best Co. announced that it has affirmed the financial strength rating of ‘A-‘ (Excellent) of Bermuda-based Pacific Century Insurance, with a stable outlook.

“The rating reflects the organization’s excellent capitalization, outstanding investment performance and tightened expense control,” said Best. “Since the initial public offering of its holding company, PCI has continued to generate internal surplus growth through retained earnings. The company’s capital and surplus grew by 5.9 percent in fiscal year 2002, compared to 8.5 percent in the prior year. At year-end 2002, PCI maintained a secure Best’s Capital Adequacy Ratio (BCAR), which measures capitalization on a risk-adjusted basis, despite the fixed income portfolio’s decline in credit quality.”

Best observed that “In view of the company’s significant cash resources, the modest shareholder dividend payment in fiscal year 2002 had an immaterial impact on its balance sheet strength. PCI’s investment performance remains superior to market indices. Cash and bonds investment, which accounted for 53 percent of total assets as at year-end 2002, generate stable cash flows and mitigate the impact of reduced premium volume.”

It noted that the “company also benefited from capital gains, which amounted to HKD 154 million (USD 19.7 million) in fiscal year 2002. Additionally, a high level of liquidity has been maintained, with cash representing 1.7 times of current liabilities. The company’s financial performance is enhanced by its tightened expense structure, which is of particular importance as premium income has experienced a significant decline.”

Best’s analysis also reflects a 5 percent decrease in total management and operating expenses in fiscal year 2002, with a further decrease expected this year.

“These factors are partially offset by PCI’s increased investment risk and the decline in the company’s agency force and productivity, said Best. “Although liquidity remains strong, the company’s strategy of shifting its investment portfolio towards lower rated fixed income issues and equity investments will place pressure on the company’s risk-adjusted capitalization and cause greater volatility in investment return.”

Concerning the company’s agency force Best noted that it “has historically been a competitive advantage; however, the number of agents declined significantly in fiscal year 2002, leading to a reduction in in-force business premium. The agents’ productivity level also fell to the lowest level since fiscal year 1999, which is reflected by the deterioration in the company’s lapse rate. The agency productivity has improved in the first and second quarters of fiscal year 2003, and the number of agents has stabilized.”

Best said it would “closely monitor these developments.”

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