A.M. Best Affirms Rating of Pacific Century Insurance Company Ltd.

OLDWICK, N.J. -- A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) of Pacific Century Insurance Company Ltd. (PCI) (Bermuda). The outlook is stable.

The rating reflects PCI's prudent capitalization, improvement in operating performance and cautious expense control.

Despite the outbreak of SARS in Hong Kong in early 2003, PCI has achieved satisfactory operating performance. The company's lapse ratio experienced a decline, while its agency productivity recorded an improvement in 2003. PCI's annualized first year premium per agent per month increased from HKD 11,300 (USD 1,449) in 2002 to HKD 19,900 (USD 2,551) in 2003. Favorable operating performance has led to a significant increase in embedded values in 2003.

In light of the increased competition in the life market in Hong Kong, PCI has continued to tighten its expense structure to enhance its profitability. The management expenses were reduced by about 10% in 2003.

The Best's Capital Adequacy Ratio (BCAR), which measures capitalization on a risk-adjusted basis, demonstrates that the company is adequately capitalized. Consistent growth in internal surplus has steadily enhanced the capital position of the company over the past three years. The company's capital and surplus position increased by about 9.7% in 2003, as compared to 5.5% in 2002.

These positive factors are partially offset by PCI's exposure to the interest rate risk, the steady decline in market position of its non-linked individual business and the increased market competition from bank-owned life insurers.

Earnings from PCI's investment portfolio are subject to the interest rate volatility as bonds and cash represented more than 70% of its invested assets. Due to the upward movement of interest rates, PCI suffered a net investment loss of HKD 4.4 million (USD 0.56 million) for the first six months ended 30 June 2004, compared with the positive net investment income of HKD 255.8 million (USD 32.8 million) for the same period in 2003. A continued increase in interest rates in the coming year is likely to adversely affect the values of PCI's bond portfolio.

PCI's market share in the individual non-linked business steadily diminished from 5.3% in 2001 to 3.4% in 2003, although new premium from non-linked business exhibited a growth of 33% in 2003. Prospectively, the company will continue to face challenges from other international life insurers that have significant capital support and that are owned by banks with strong distribution capacity.

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 http://www.ambest.com.