Best Affirms Sun Hung Kai Properties ‘A-‘ Rating

January 12, 2006

A.M. Best Co. announced that it has affirmed the financial strength rating of “A-” (Excellent) and assigned an issuer credit rating of “a-” to Hong Kong-based Sun Hung Kai Properties Insurance Limited (SHKPI), with a stable outlook.

“The ratings reflect SHKPI’s satisfactory risk-adjusted capitalization, strong distribution support from its parent company, Sun Hung Kai Properties Ltd., high liquidity and consistently positive operating results,” said Best.

“SHKPI’s underwriting performance improved further in fiscal year 2005, with the overall loss ratio decreasing to 73.9 percent from 82.5 percent last year. The investment income and reinsurance commission income have pushed the company’s operating ratio down from 46.3 percent in fiscal year 2004 to 30.8 percent in fiscal year 2005,” it continued.

Best noted: “SHKPI has maintained a satisfactory capital position given its low retention of risks written. The net adjusted premium leverage ratio decreased further to 0.46 times in 2005, falling within a comfortable margin to offset any short-term pressure on underpricing or increase in losses. The consistent positive operating results have strengthened the company’s capital and surplus with an average growth of 14.3 percent over the past five years. With approximately 51.2 percent of total assets allocated to cash and deposits at the end of fiscal year 2005, the company maintains a high liquidity position with regard to the risks underwritten.

“Leveraging the parent company’s support, SHKPI derives significant benefits of business generated from in-house and associated companies. The substantial support from the group business has provided the company with a fair degree of flexibility on building a quality and steady portfolio.”

As “offsetting factors” Best cited, “significant private equity investments, heavy concentration on liability business and the deteriorating profitability of the liability business.” Best explained that while it “recognizes SHKPI’s private equity investment exposure, the company’s recent increase of private equity investments in two newly established China insurers in fiscal year 2004 lessens its financial flexibility. Although SHKPI’s risk-adjusted capitalization, which is measured by Best’s Capital Adequacy Ratio, indicates an adequate solvency margin to support its current rating, any further substantial private equity investments would burden the risk-based capitalization.”

Best also indicated that, historically, “SHKPI has a high degree of concentration on liability business, especially the employees’ compensation (EC) sector, which represents about 88 percent of the portfolio on a net premium basis. Prospectively, the continuing softened premium rates in EC and the general liability line could have a negative effect on the company’s underwriting profit in the near term.”

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