Standard & Poor's has assigned a below-investment-grade credit rating to newly listed Pacific Century Insurance because of the company's 'overall weak financial strength'. The Bpi rating is a big blow to the SAR's sixth-largest life insurer, as it precludes many fund managers from buying its securities. Many managers are restricted from investing in securities with such a rating. It was the first time Standard & Poor's had given such a rating to a Hong Kong life insurance company, the agency's associate director Michael Gross said. He said the company's weak financial position was mainly a result of its extensive reinsurance arrangements and its modest capital strength. A reinsurance arrangement is a type of risk-management practice in which a life insurer sells some of its policies to other companies. Under such an arrangement, the insurer receives a commission from the reinsurance companies, which immediately boosts its financial position, according to Mr Gross. However, in following years, the insurer must pass the premium income from the life policies onto the reinsurers, which significantly reduces its future income. Mr Gross said many insurance companies used reinsurance arrangements, but not as extensively as Pacific Century does. Other insurance companies would have only 5 to 10 per cent of their life business sold to reinsurers, but Pacific Century Insurance had sold 35 per cent of its new business. 'The extensive use of reinsurance arrangements reflects the insurer [Pacific Century Insurance] is not trying to pass the risk but to raise funds by selling the policies to the reinsurers,' he said. 'This is to swap future profit for current growth.' Mr Gross said the insurer's parent had a modest capital strength of $355.6 million as at the end of last year, which would limit its capacity for future growth. Pacific Century Insurance also had a weak operating performance because its agent team had declined last year. The number of policy-holders who decided to let their policies lapse last year had increased by 90 per cent from 1997, Mr Gross said. However, he said Pacific Century Insurance's ranking as Hong Kong's sixth-largest life insurance company meant it was still in a good market position. He also pointed out that the rating given was based on public information about the company and that S&P's had not interviewed its management. Pacific Century Insurance's deputy chairman and chief executive Andrew Yang Fan-shing said the agency should not have given the rating without talking to the insurers. He said reinsurance was a risk-management measure adopted by all insurers. Mr Yang also said the capital strength of Pacific Century Insurance's parent has risen to more than $900 million after a share offering in the middle of this year. But he said he would not complain to Standard & Poor's.