Best Affirms Dao Heng ‘A-‘ Rating

November 18, 2005

A.M. Best Co. announced that it has affirmed the financial strength rating (FSR) of “A-” (Excellent) and assigned an issuer credit rating (ICR) of “a-” to Hong Kong insurer Dao Heng Insurance Company Limited (DHI) with a stable outlook.

“The ratings reflect DHI’s solid risk-adjusted capitalisation, consistent underwriting performance and short-tailed risk exposure. The ratings also consider the company’s liquid and conservative investment strategy,” said Best.

“DHI maintains a liquid investment portfolio with cash accounting for approximately 58 percent of total assets. Equities and unit trusts represented only about 15 percent of total assets at the fiscal year end of 2005,” Best continued. “The net dividend and interest income of DHI has increased to HKD 3.2 million (USD 0.4 million) in fiscal year 2005 from HKD 2.7 million (USD 0.3 million) in fiscal year 2004. A conservative investment strategy will continue to contribute to the company’s financial stability.

“Despite softening premium rates and intense market competition in Hong Kong in recent years, DHI has been able to maintain profitability with a 5-year average combined ratio of 84 percent. The company primarily focuses on property damage and accident & health lines, which are generally short-tailed in nature. Consistently profitable underwriting results and stable investment returns have contributed positively to the net income of the company.

“The Best’s Capital Adequacy Ratio, which measures the capitalization on a risk-adjusted basis, demonstrates that the company is adequately capitalized. DHI’s net premiums written were approximately 0.5 times of its capital and surplus in fiscal year 2005.”

Best noted, however, that DHI’s deteriorating underwriting margin and its limited market presence partially offset the positive rating attributes. ” Despite the continued improvement in its expense ratio, the company needs to further tighten its underwriting controls and enhance its distribution efficiency to achieve a higher level of underwriting margin,” said Best.

The rating agency noted that “as a result of DHI’s limited market presence, the company’s business volume only represents about 0.5 percent market share in the Hong Kong non-life market. Going forward, the company’s business growth over the mid to long term will depend on the company’s ability to strengthen its distribution capabilities.”

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