A.M. Best Affirms Rating of Hang Seng Insurance Company Limited.

OLDWICK, N.J. -- A.M. Best Co. has affirmed the financial strength rating of A+ (Superior) and the issuer credit rating (ICR) of "aa-" of Hang Seng Insurance Company Limited (Hang Seng Insurance) (Hong Kong). The outlook on both ratings is stable.

The ratings reflect Hang Seng Insurance's strong risk-adjusted capitalization, consistent operating performance and secure distribution network. The ratings also recognize the company's liquid and conservative investment portfolio.

Hang Seng Insurance's risk-adjusted capitalization, as measured by Best's Capital Adequacy Ratio (BCAR), decreased moderately in fiscal year 2005 due predominantly to a decrease in capital and surplus and an increase in risk retention. The company's capital position has remained strong. The net premium leverage ratio deteriorated moderately to 0.53 times in fiscal year 2005 from 0.51 times in fiscal year 2004. Given the company's past profitability and earnings retention, A.M. Best expects Hang Seng Insurance's risk-adjusted capitalization to remain adequate over the medium term.

Hang Seng Insurance's underwriting performance has been relatively stable for the past five years. The combined ratio was lower in fiscal year 2005 compared to fiscal year 2004 as a result of a lower claims ratio. Good underwriting results along with higher investment returns resulted in a strong return on equity of 20.6% in fiscal year 2005. Profitability for 2006 is expected to be similar to 2005 levels.

Bancassurance remains the company's core distribution channel. As of September 2006, 82% of gross premium income was derived from its parent company, Hang Seng Bank. Hang Seng Insurance benefits from cross selling to its parent company's customer base. Going forward continued penetration into the customer base of Hang Seng Bank is expected to further strengthen the company's premium income.

Hang Seng Insurance has a highly liquid investment portfolio, with cash & short-term deposits and bonds accounting for nearly 71.5% of its total assets in 2005. Its high-quality bond portfolio is denominated in Hong Kong dollars, which results in minimal currency risk. The company had decreased its investments in equities and equity unit trusts from 70% of total assets in 2001 to 9.4% of total assets in 2005. This change in asset mix has enhanced the company's risk adjusted capitalization.

Offsetting factors include the continued pressure on the company's underwriting profitability and limited growth potential in the local insurance market.

Hang Seng Insurance's underwriting margin improved slightly in fiscal year 2005. However, competitive pressure has affected most business lines over the period, slightly impacting profitability for the year to September 2006. Further, any drive to obtain top line growth could result in downward pressure on profitability. Nonetheless, affiliation with Hang Seng Bank has generally provided Hang Seng Insurance with a degree of brand loyalty from retail customers.

Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the financial services industries, including the banking and insurance sectors. For more information, visit www.ambest.com.