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

OLDWICK, N.J. -- A.M. Best Co. has affirmed the financial strength rating (FSR) of A- (Excellent) and assigned the issuer credit rating (ICR) of "a-" of Pacific Century Insurance Company Ltd (PCI) (Hong Kong, China). The outlook on both ratings is stable.

The ratings reflect PCI's adequate risk-adjusted capitalization, improving operating performance and stable profitability in the life operation.

PCI experienced continued improvement in new business generation, lapse rates and agency force productivity in 2004. In line with their dynamic market growth, the company's new business for individual life recorded a growth rate of 48% in 2004. PCI's lapse rates have trended downward to 13.4% in 2004. Improving operating performance will further enhance the company's embedded values.

PCI achieved steady growth of capital through earnings retention, increasing 6.2% in 2004. Despite higher asset risks, the company's risk-adjusted capitalization, as measured by Best Capital Adequacy Ratio, remained adequate and supportive of its current rating.

Offsetting considerations include further decline in market position, increased exposure to equities and funds and a higher degree of financial leverage.

PCI's market share in the individual non-linked business fell from 5.3% in 2001 to 3.2% in 2004, although the growing agency force and improving productivity are expected to strengthen the company's distribution capabilities.

Going forward, PCI's market profile will continue to be challenged by increased competition from both well-established companies with strong parental support and insurers with bancassurance distribution models.

In response to rising interest rates, PCI re-allocated its investment asset mix by increasing its exposure to equities and funds in 2004. This change could translate into higher volatility in the company's investment earnings, although PCI has a strong track record of positive investment performance.

The issuance of USD 100 million in bonds by PCI to facilitate its business expansion plans in China will potentially lessen the company's overall financial flexibility. PCI invested HKD 508 million (USD 65 million) in the non-interest bearing exchangeable notes as a way to tap into the fast growing life insurance market in China. In light of the uncertainties relating to investments in the exchangeable notes, A. M. Best remains cautious about PCI's business expansion plans in China and the impact on the company's earnings stability.

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.