Best Affirms HSBC Insurance Ratings

A.M. Best Co. has affirmed the financial strength rating of “A+” (Superior) and the issuer credit rating of “aa-” of Hong Kong-based HSBC Insurance (Asia) Limited with a stable outlook.

“The ratings of HSBC Insurance reflect its consistently profitable underwriting performance, prudent investment portfolio and prominent market position in the Hong Kong general insurance market,” said Best. “The ratings also recognize HSBC Insurance’s sustainable competitive advantage through the broad branch network of Hong Kong and Shanghai Bank Corporation (HSBC), the largest licensed bank in Hong Kong.

“The company’s underwriting performance remained profitable in 2006. Despite the increase in loss ratio to approximately 46 percent for year-end December 2006 (36 percent in 2005) due to the integration of the medical portfolio from HSBC Medical Insurance, HSBC Insurance maintained a combined ratio of 83 percent. This was mostly reflective of the improved economies of scale through net premium growth.

“HSBC Insurance has established strong brand name recognition in Hong Kong over the years. The company ranked second, representing 5.8 percent of the domestic non-life market (as measured by gross premiums written (GPW)) in 2006. While the company continues to utilize the broker channel, more than 50 percent of HSBC Insurance’s GPW is derived from bancassurance, which will continue to serve as its primary distribution channel.

“The company’s investment portfolio continues to be conservative. Apart from its affiliated investment, all investments are held in fixed-income securities, cash and term deposits. As a result, operating earnings will be less influenced by fluctuating equity market conditions.”

However, Best indicated that the “deterioration in the company’s risk-adjusted capitalization and the increased pressure on the underwriting margin as competition increases,” should be taken into account as partial offsetting factors.

Best explained that “in addition to higher underwriting risk resulting from the transfer of the non-life portfolio from HSBC Medical Insurance to HSBC Insurance in 2006, the substantial dividend payment of HKD 727 million (approximately USD 93 million) weakened the company’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio.

“HSBC Insurance’s ability to generate internal surplus growth is limited by its high dividend payout ratio (100.5 percent in 2006), which averaged 83.3 percent over the past five years. While A.M. Best believes that HSBC Insurance will continue to support its insurance subsidiaries in Hong Kong, high retention of operating earnings is critical for the company to strengthen its capitalization.

“Despite a continued profitable underwriting result being expected for 2007, A.M. Best believes that HSBC Insurance will face ongoing challenges on underwriting profitability due to continued softening market conditions.”