30/07/2011 03:30AM Australia/Sydney
HONG KONG (BUSINESS WIRE)
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
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
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
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.
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