A.M. Best Affirms Ratings of Sun Hung Kai Properties Insurance Limited

A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) and issuer credit rating of "a-" of Sun Hung Kai Properties Insurance Limited (SHKPI) (Hong Kong). The outlook for both ratings is stable.

The affirmation of the ratings reflects SHKPI's consistent operating profit and solid risk-adjusted capitalization. The company is a wholly owned subsidiary of Sun Hung Kai Properties Limited, one of the leading property developers and conglomerates in Hong Kong. SHKPI gains operating synergies through product distribution with the parent group, enabling SHKPI to maintain a stable market presence in its key business—general liability insurance in the local industry.

SHKPI's underwriting profitability remains strong, demonstrated by its five-year average combined ratio of 53% during fiscal years ended June 2007-2011. SHKPI's business model keeps the company's acquisition costs low, easing the profit impact from the rising trend of the loss ratio and results in a favorable combined ratio. The company also has a track record of a successful investment performance. The investment income raises the profit further.

SHKPI's risk-adjusted capitalization remains supportive of the assigned ratings. Net premium leverage is maintained at a conservative level (0.20 times as at June 2011). The surplus level increased with the profitable operation, although the growth remains modest because of SHKPI's high dividend payout practice (average dividend payout ratio of 74% in the past five years). The asset composition remains highly liquid, with cash and cash equivalents accounting for over half of invested assets.

Partially offsetting these positive rating factors is the potential volatility in future profitability due to investment activities. Capital gains from investment disposal and revaluation profits from investment properties have been the major operating profit contributor in the past three years. The amount of realized capital gains is expected to decrease in coming years after a series of asset liquidations. With the potential drop in local property prices, reduced investment income could lead to a short-term fluctuation of SHKPI's earnings.

A.M. Best does not expect positive rating actions on SHKPI over the near term. Factors that could lead to negative rating actions include notable deterioration in the company's operating performance or risk-adjusted capitalization.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: "Understanding Universal BCAR"; "Catastrophe Analysis in A.M. Best Ratings"; and "Risk Management and the Rating Process for Insurance Companies." Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2012 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.

Contacts:

A.M. Best
Vivian Cheung
Financial Analyst
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Rachelle Morrow
Senior Manager, Public Relations
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or
Moungmo Lee
General Manager
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or
Jim Peavy
Assistant Vice President, Public Relations
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