A.M. Best Affirms Rating for Sun Hung Kai Properties Ltd.

A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) of Sun Hung Kai Properties Insurance Limited (SHKPI), Hong Kong. The outlook is stable.

The rating reflects SHKPI’s prudent capitalization, adequate liquidity and improved underwriting performance. The rating also views favorably the company’s conservative reserving standards and the hardening general insurance market, which is expected to persist in the near future.

Despite robust premium growth and generous dividend repatriation in fiscal year 2002, the company’s risk-adjusted capitalization, as measured by the Best’s Capital Adequacy Ratio (BCAR), has been maintained at a level commensurate to the current rating. Net premium leverage stood at 0.52 times as at fiscal year-end 2002. Prospectively, internal capital generation through retained earnings is expected to partially offset the impact of new business strain.

Liquidity has remained sufficient; as at fiscal year-end 2002, over 57% of total assets consisted of cash and time deposits, which are used to fulfill cash flow obligations and statutory requirements. Another 33 percent of assets were invested in riskier investment vehicles, such as convertible and high-yielding bonds, private equities and investment properties. While these instruments on a stand-alone basis tend to produce high volatility, the company’s investment portfolio is deemed to be adequately conservative given the cash holdings.

As a quasi-captive insurer, SHKPI retained only 34 percent of inward business in fiscal year 2002. Commission income has acted as a sizable buffer for fluctuations in loss experience. The combined ratio of 76 percent for fiscal year 2002 compares favorably with the industry average of 91 percent and represents an improvement of 13 percentage points over the previous underwriting year. In particular, the employees’ compensation (E/C) business, which accounts for the majority of premium income, has experienced positive developments, which include hardened premium rates and stabilized loss experience.

Providing further comfort is the reserve adequacy of the motor and E/C claims liabilities as demonstrated by a third-party actuarial estimate. In light of the adverse loss experience of these lines of business within the market, the insurance authority’s requirement for external reserve certification is seen as a necessary condition to improve the experience of these long-tail business lines.

Offsetting factors are the exposure to Hong Kong’s property market and the intense competition that will continue to prevail in the general insurance industry.

The company’s exposure to the property market is twofold. First, as a wholly-owned subsidiary of the Sun Hung Kai Properties Ltd., SHKPI derives a significant portion of its premium base from the parent’s development projects. Against the backdrop of deflating property prices, long-term growth prospects are dampened. The impact on premium volume is, to some extent, mitigated by the recent premium rate increases. Second, investment properties account for close to 16% of total assets. From a high of HKD 205 million (U.S. $26 million) in fiscal year 1997, the value of property investments decreased to HKD 105 million (U.S. $13 million) in fiscal year 2002, during which the property revaluation has also been depleted.

Notwithstanding the trend of hardening premium rates, the general insurance industry in Hong Kong will continue to be characterized by its fragmented market structure and keen competition amongst small-to-medium sized carriers. In the long term, this will present challenges to the company as it further diversifies away from group-related business.