A.M. Best Affirms Rating of HSBC Insurance, Asia, Limited.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--Feb. 24, 2003

A.M. Best Co. has affirmed the financial strength rating of A+ (Superior) of HSBC Insurance (Asia) Limited, Hong Kong. The outlook is stable.

The rating reflects HSBC Insurance's prudent capitalization, well-structured reserving and reinsurance guidelines, conservative investment portfolio and superior underwriting performance. Further supporting the rating is the company's extensive distribution network.

The Best's Capital Adequacy Ratio (BCAR), which measures capitalization on a risk-adjusted basis, indicates that the company is strongly capitalized. The adjusted capital and surplus (after dividend distribution) increased by 12.4% in 2001, compared to 4.4% in 2000.

While the company's net premium leverage is higher than that of its peers, its prudent reserving and reinsurance guidelines have contributed to enhancing its financial strength. Prudent reserve levels have been maintained for the long-tail motor and employees' compensation business lines. The reinsurance programs, which are backed by highly rated reinsurers, are also deemed to be conservative for the company's risk exposures.

Current liquidity stood at 135.6% at year-end 2001, compared to 125.4% for the previous year. At year-end 2001, cash and cash equivalents accounted for 24.2% of the asset portfolio, and a further 66.6% consisted of mostly high-quality fixed income securities.

The underwriting performance of HSBC Insurance is consistently superior to that of the general insurance market. In 2001, the company posted a loss ratio of 42.7%, compared to the market average of 60.7%. Although the expense ratio of 41.3% is slightly higher than the average of 39.4%, the combined ratio compares favorably with that of the industry.

Being a core subsidiary of the HSBC Bank, the company derives tremendous benefits from the operational synergies that exist. Approximately 60% of its gross premium income is derived from bancassurance. With a vast customer base, HSBC Bank will continue to serve as the primary distribution channel.

Offsetting factors include a significant amount of profit repatriations, relatively unprofitable motor and employees' compensation portfolios and the uncertain operating environment.

The ability to generate internal surplus growth is limited by the HSBC Group's dividend requirements. The dividend payout ratio for 1999 to 2001 averages 76.7%. The dividend payments represented 63.2% of paid-up capital in 2001.

The motor and general liability portfolios remained the worst performers in 2001, with loss ratios of 70.5% and 92.9%, respectively. Going forward, hardened premium rates and tightened underwriting controls are expected to gradually improve the loss experience of these two portfolios.

Continued deterioration in Hong Kong's macroeconomic climate will have negative implications for the insurance industry. Growth prospects in the personal insurance sector will be hampered by a prolonged recession, while investment earnings will be pressured by adverse investment conditions. Competition in the general insurance industry will also remain intense.

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.