Best Affirms Hang Seng Insurance ‘A+’ Rating

May 11, 2004

A.M. Best Co. announced that it has affirmed the financial strength rating of “A+” (Superior) of Hang Seng Insurance Company Limited (Hong Kong) with a stable outlook.

“The rating reflects the company’s asset rebalance in fiscal year 2003, strong risk-adjusted capitalization, strategic alliance with its parent, Hang Seng Bank, and solid underwriting performance,” said Best. “Other positive factors include the premium growth in the industry and the improvement in the underwriting result of the general liability business line. Offsetting factors include a high dividend payout ratio and softening trend in the property damage line of business.”

The rating announcement pointed out that “In late fiscal year 2003, the company rebalanced its investment portfolio, shifting a significant part of its equity investments to bond investments. While the company had no investment in bonds after May 2001, it significantly increased the weight of bond investments to 33 percent of its total assets in fiscal year 2003. Meanwhile, its equity investments decreased from 60 percent of total assets in fiscal year 2002 to 15 percent in fiscal year 2003. The new investment portfolio will enable the company to earn more stable returns in the future and to reduce the impact of market fluctuations on the company’s capital and surplus.”

Best said Hang Seng now had “a very strong risk-adjusted capital position,” due primarily to the investment rebalancing. It also “benefits from the strategic alliance with its parent, Hang Seng Bank, which owns 100 percent of the company’s shares. Hang Seng Bank is the second-largest locally listed bank in Hong Kong in terms of market capitalization, with a very good brand name and an extensive branch network. Hang Seng Bank provides a distribution channel for Hang Seng Insurance through bancassurance.”

As “negative factors,” Best cited “the high level of dividend payout ratios to its parent. As of fiscal year 2003, its five-year average dividend payout ratio stood at 135 percent. If the level of dividend payments remains high in the future, the company’s potential for capital growth will be limited. It also warned of the “softening trend in the property damage line of business in the Hong Kong insurance industry. Since this line of business accounts for 33 percent of the company’s net premium written as of fiscal year 2003, the decreasing profitability in this business line may impact the company.”

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