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30/07/2011 03:30AM Australia/Sydney

A.M. Best Affirms Ratings of TOWER Limited and Its Subsidiaries

A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) and issuer credit ratings (ICR) of “a-” of TOWER Insurance Limited, TOWER Health & Life Limited (THL) and TOWER Life (N.Z.) Limited (TLNZ). A.M. Best also has affirmed the ICR of “bbb-” of these subsidiaries’ parent, TOWER Limited. The outlook for all ratings is stable, and all companies are domiciled in New Zealand.

TOWER Limited’s rating reflects the group’s continued overall operating profitability and improved risk-adjusted capitalization.

TOWER Limited’s after-tax profits increased by 16% to NZD 58 million in fiscal-year 2010, with all insurance segments contributing to the group’s profit growth. Operating profits remained positive into the first half of fiscal-year 2011 and lapse rates for all insurance segments continued to improve.

Retained earnings increased the group’s absolute capitalization by 9% to NZD 441 million, and underwriting risk remained stable compared with the prior year. As a result, TOWER Limited’s risk-adjusted capitalization improved in fiscal-year 2010.

Offsetting rating factors include concerns over TOWER Limited’s lower near-term profitability and potential capital demand for organic growth and strategic opportunities. Near-term profit contributions from the group’s general insurance business could decline as anticipated premium rate hikes take time to flow through to overall earnings. Lower investment yields are anticipated to impact the life business, while escalated claims are challenging the health business. Potential acquisitions and efforts to improve TOWER Limited’s’ market presence could result in capital demand and weaken the company’s risk-adjusted capitalization.

The ratings of TOWER Insurance Limited reflect its solid operating performance and improved risk-adjusted capitalization. The ratings also consider the potential support in capital management by TOWER Limited. The company’s fiscal-year 2010 net income increased by 31% to NZD 22 million, and its underwriting performance continued to improve. At 60%, 30% and 90% respectively, the company’s loss, expense and combined ratios dropped below their five-year averages.

Earnings retention increased TOWER Insurance Limited’s absolute capitalization. Lower net premium leverage resulted in a decline of underwriting risk; consequently, risk-adjusted capitalization strengthened over the year. Support from TOWER Limited could help to offset potential negative rating factors that could weaken the company’s risk-adjusted capitalization going forward.

The negative rating factors for TOWER Insurance Limited include the accumulation of retained catastrophe losses and reinsurance recoverables, as well as potentially higher catastrophe reinsurance excesses and reinstatement costs going forward. The accumulation of retained losses related to the 2011 Christchurch earthquakes could potentially lower the company’s risk-adjusted capitalization. The accumulation of reinsurance recoverables will likely increase credit risk. Prospectively, higher catastrophe reinsurance excesses and reinsurance reinstatement costs also could weaken the company’s risk-adjusted capitalization, especially in a catastrophe scenario. However, supportive capital management by TOWER Limited could significantly reduce the influence of these negatives on TOWER Insurance Limited’s risk-adjusted capitalization.

The ratings of THL recognize its consistent growth in embedded value and improved lapse experience. THL’s embedded value has grown consistently over the review period, and together with growth in its appraisal value, is reflective of contributions to shareholder value of existing and future new business. Although the company’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), deteriorated due to risk associated with transferring a sister company to become a subsidiary, the BCAR remains adequate for the ratings. The company’s capitalization is anticipated to strengthen in the current fiscal year on the back of profitable operations and a stable risk profile.

Lapse experience in THL’s health portfolio has improved compared with the previous fiscal year due to the company pursuing an active retention program. Similarly, life lapse experience has seen a generally decreasing trend in the past few years.

Offsetting rating factors are the strong competition faced by THL and the uncertain implications in the change in taxation laws. THL has experienced a steady decline in health insurance policy count, although premium revenue has increased due to age-related increases as well as rate increases. Furthermore, legislated tax changes have impacted THL’s business, and the company is continuously adjusting its strategy in reaction to actions of market participants.

TLNZ’s moderate capitalization, established position in the group risk market and stable operating performance has contributed to its ratings, while offsetting rating factors include the company’s reliance on brokers for business placement and exposure to operational risk.

TLNZ was capitalized adequately for the recommended rating level at 30 September 2010 despite its risk-adjusted capitalization significantly deteriorating due to a dividend payment of NZD 9.2 million. The company’s group risk portfolio market share has declined in 2010; however, the company continues to hold a meaningful position in the group risk market, capturing approximately 15.6% of the group risk market (as measured by in-force premiums) at September 2010.

TLNZ recorded a moderate increase in net profits in 2010, generating strong investment returns. The settlement of inter-company tax balances dampened its profitability, and profits flowing out of the closed book of participating business, together with a continued reduction in management expenses, have contributed to earnings.

From a business risk perspective, TLNZ is essentially reliant on three international brokers, since over 70% of group business is derived from these brokers. Operationally, the recent corporate restructuring could potentially result in knowledge/process gaps resulting from loss of institutional knowledge, which may negatively impact TLNZ’s operations.

The principal methodology used in determining these ratings is Best’s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Understanding BCAR for Property/Casualty Insurers”; “Natural Catastrophe Stress Test Methodology”; “Assessing Country Risk”; “Rating Members of Insurance Groups”; “A.M. Best’s Ratings & the Treatment of Debt”; and “Risk Management and the Rating Process for Insurance Companies.” Methodologies 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 © 2011 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.


A.M. Best Co
Chi-Yeung Lok
Financial Analyst
Stella Ng
Associate Director
Carole Lovell
Public Relations Associate
+(1) 908 439 2200, ext. 5445
Jim Peavy
Assistant Vice President, Public Relations
+(1) 908 439 2200, ext. 5644

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