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HONG KONG

A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of Blue Cross (Asia-Pacific) Insurance Limited (Blue Cross) (Hong Kong). The outlook for both ratings is stable.

The rating affirmations reflect Blue Cross’ solid solvency level and capitalization. The statutory solvency ratio and risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), remains strong and supportive of the current ratings. The high retention of operating profit from the general insurance portfolio and the reduced risk exposure from the legacy life insurance portfolio will be the main contributors to the company maintaining its adequate capital buffer in the future.

Blue Cross also has a stable market presence in the local accident and health insurance industry. The balanced premium mix from the direct, agent and broker channels has contributed to the consistent increase in the individual and group medical insurance business. The robust premium income growth has resulted in a favorable trend in the company’s expense ratio.

Moreover, Blue Cross has taken initiatives to strengthen the underwriting measures of its employees’ compensation insurance portfolio. The enhanced business quality and better risk control has led to an improving loss experience in this portfolio.

Partially offsetting these positive rating factors is the challenging operating environment of the medical insurance industry. This is demonstrated by an increasing trend in the claim ratio from Blue Cross’ medical business. The medical claim cost surges by a rate higher than the general inflation, while the premium rate adjustment capability of the company is constrained due to the price competition among its peers.

The allocation in equity investments from the inforce saving products in the legacy life insurance portfolio also created volatility in Blue Cross’ capitalization. This volatility was observed under the company’s unrealized investment loss in 2011 in which there was an increase in fair value of its investment in 2010. This capital fluctuation may still occur until a large portion of the life portfolio matures.

While the outlook for the ratings is stable, there may be positive rating actions if the underwriting profitability of Blue Cross’ medical business improves and its investment performance becomes less volatile. However, downward rating pressure could occur following any significant reduction in risk-adjusted capitalization caused by any further deterioration in the company’s claim experience or material investment losses.

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”; “Risk Management and the Rating Process for Insurance Companies”; and “Catastrophe Analysis in A.M. Best Ratings.” 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.

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