A.M. Best Affirms Rating of HSBC Insurance (Asia) Limited.

OLDWICK, N.J. -- A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and assigned an issuer credit rating (ICR) of "aa-" to HSBC Insurance (Asia) Limited (HSBCI) (Hong Kong). The outlook for both ratings is stable.

The ratings reflect HSBCI's considerable market presence, consistent operating performance, improvement in risk adjusted capitalization and conservative investment portfolio. The ratings also consider the benefits derived from being part of the Hong Kong and Shanghai Banking Corporation (HSBC), the largest licensed bank in Hong Kong.

Backed by the strong brand name of its parent, HSBCI has built up a favorable market profile in the domestic non-life market. In addition to the traditional broker channel, the company is able to tap the mass market through the extensive branch network of HSBC in Hong Kong, further securing its market position. Going forward, continued penetration into the customer base of HSBC is expected to further strengthen the company's premium growth.

Despite the softening in market premium rates, the company still maintains strong operating profitability. Its operating ratio was kept at a level lower than 70% over the past five years. Stringent underwriting controls contributed to the relatively low level of claims experience.

Notwithstanding the moderate deterioration of loss ratio to 35.7% in 2005, the company's net claims experience remained relatively favorable.

HSBCI recorded a moderate improvement in its risk adjusted capital position in 2005, although the transfer of the whole general insurance portfolio from HSBC Medical Insurance to HSBCI significantly exacerbated the company's underwriting risk. Retention of operating earnings resulted in the growth of the company's risk adjusted capitalization in 2005.

Offsetting factors include dividend payout and increasing pressure on underwriting profitability due to intense market competition.

Capital repatriation through dividend payout limits the growth of the company's internal surplus. The company's dividend payout over the last five years averaged 66.3%. Prospectively, enhancing the company's capitalization through retained earnings is imperative for HSBCI's business growth in the mid to long term.

Strong market competition and an adverse pricing cycle are expected to translate into a higher level of volatility in underwriting profitability for HSBCI, although the company's underwriting margin remained favorable as compared to that of its peers in 2005.

For Best's Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

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.