A.M. Best Affirms A- Rating of Pacific Century Insurance Holdings Ltd., Hong Kong.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--May 8, 2001

A.M. Best Co. has affirmed the A- (Excellent) financial strength rating of Pacific Century Insurance Holdings, Ltd. (PCI Holdings) and its insurance subsidiary, Pacific Century Insurance Company, Ltd., both of Hong Kong.

The rating reflects the organization's favorable risk-adjusted capitalization, large and effective career agency distribution system and experienced management team. In addition, PCI Holdings capital strength has benefited from a flexible, low risk liability structure--70% of insurance obligations are non-guaranteed contracts--and a high quality, liquid investment portfolio. This liability structure and liquid asset focus allowed the firm to minimize its asset exposure during the previous Asian financial markets crisis without compromising overall operating performance.

Partially offsetting these factors is PCI Holdings status as a relatively nascent company in Hong Kong's highly competitive insurance market. PCI Holdings ability to achieve the size and scale necessary to support its capital needs by internal profit generation will become increasingly important as it competes with larger domestic and foreign financial institutions and looks to diversify operations into other parts of Asia.

Following the initial public equity offering in July 1999 by PCI Holdings, the organization enhanced financial flexibility to adequately support the expected business needs over the near term. PCI Holdings continues to solidify that position by providing long-term insurance and retirement schemes in the competitive Hong Kong life insurance market.

Previously, the organization had relied on financial reinsurance to support expanding activities. However, this practice was discontinued in 2000. Simultaneously, the organization adopted US GAAP accounting standards with regards to commission expenses, which effectively capitalized acquisition costs by amortizing them over the life of a policy. As a result of these initiatives, A.M. Best expects the organization to generate a more consistent pattern of operating performance. Nonetheless, A.M. Best believes that enhancing policyholder retention is a major factor in the organization's ability to reach a level of self-sustaining profitability.

Although policyholder reaction to the Asian economic financial crisis negatively affected contract surrender activity, the organization's policy retention rate has continued to remain lower than several competitors' and below A.M. Best expectations. However, A.M. Best expects this trend to improve as the organization institutes a policyholder conservation strategy and modifies its agent commission structure to encourage longer-term persistency.

The organization's extensive and loyal career agency network has historically been a competitive advantage in solidifying its position in the Hong Kong insurance market. However, its ability to sustain growth is being challenged by the emergence of increased market conduct regulatory standards vis-a-vis licensing examinations for life insurance agents (IIQAS) and alternative distribution channels that include banks, the Internet and direct sales. In addition, alternative distribution channels with strong asset management expertise also present competitive hurdles for the organization as it attempts to capitalize on recently mandated pension regulatory reform - Mandatory Provident Fund (MPF) schemes. This compulsory retirement saving market that was launched in December 2000, obligates businesses and employees to contribute to a MPF scheme that is managed by private companies to fund future social security benefits.

Although A.M. Best expects Pacific Century Holdings' rating to remain stable, it will continue to monitor the development of its capability to enhance internal profitability, grow in the Hong Kong market and expand into Asia--including its intention to be licensed in China.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.