HONG KONG--()--A.M. Best Asia-Pacific Limited has upgraded the financial strength rating to A (Excellent) from A- (Excellent) and issuer credit rating to “a” from “a-” of Sun Hung Kai Properties Insurance Limited (SHKPI) (Hong Kong). The outlook for both ratings is stable.
“Risk Management and the Rating Process for Insurance Companies”
The upgrades reflect SHKPI’s consistently favorable underwriting performance and investment performance, and its strong risk-adjusted capitalization.
SHKPI recorded an average combined ratio of approximately 57% over the past five years under management’s prudent underwriting strategy. The company’s historical underwriting income was mainly underpinned by favorable performance of the employees’ compensation business generated from both group-related and third party construction projects. Moreover, its low acquisition cost of group-related business and stable reinsurance commission income also contributed essentially to its favorable underwriting performance.
SHKPI leveraged on the investment arm of its parent company, Sun Hung Kai Properties Limited, when selecting an investment that offers satisfactory returns relative to its risk profile. SHKPI consistently achieved a positive investment performance over the past few years.
SHKPI’s capitalization remains solid and supportive of the current ratings on both an absolute and risk-adjusted basis. The company’s surplus was steadily strengthened through the retention of after-tax net profits despite its historical high dividend payouts.
Offsetting rating factors include the potential high earnings volatility associated with investment performance. Throughout the past five years, the company’s investment income was largely supported by material realized gains on the disposal of various private equity investments and gains from property revaluation. The company’s future investment return may be lower than its historical level in view of the expected completion on the disposal of its private equity investment portfolio in the coming years, while any potential negative revaluation from the current value of its investment properties could also unfavorably impact its future investment earnings. Notwithstanding, SHKPI’s current level of capitalization remains adequate to absorb potential earnings volatility over the short to medium term.
SHKPI is well placed for its current ratings. Factors leading to negative rating actions include the substantial deterioration in its risk-adjusted capitalization due to operating losses, and/or excessive risks taken from underwriting and/or investment activities.
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: “Risk Management and the Rating Process for Insurance Companies”; “Understanding Universal BCAR”; and “Catastrophe Analysis in A.M. Best Ratings.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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