Tue, 10 Feb 2004
OLDWICK, N.J., A.M. Best Co. has assigned an initial issuer credit rating of "bbb-" to Tower Limited (New Zealand) and a financial strength rating of A- (Excellent) to Tower Insurance Limited (New Zealand). The outlook for both ratings is negative.
The "bbb-" issuer credit rating for Tower Limited reflects its successful recapitalization and profitable New Zealand operations. The negative outlook reflects continued operational risk in Tower Australia Limited, as its lapse ratio continues to cause concern.
The A- (Excellent) financial strength rating for Tower Insurance reflects its consistently strong financial performance and market position in the personal lines property insurance sector in New Zealand. The negative outlook reflects A.M. Best's concern regarding Tower Limited's continued expectation for capital repatriation and significant dividend payments from Tower Insurance.
Tower Insurance has achieved consistent improvement in its underwriting performance. Its underwriting results increased to NZD 7.6 million (USD 4.5 million) in fiscal year 2003 from NZD 3.4 million (USD 1.4 million) in fiscal year 2000. Driven by its prudent underwriting strategy, the combined ratio has been persistently maintained at a level of less than 100% for more than five years. In spite of poor global investment markets over the past few years, Tower Insurance's investment portfolio has steadily generated positive returns with limited volatility.
Given its long operating history in New Zealand, Tower Insurance has accumulated extensive market knowledge and has established a well-balanced distribution network. Maintaining a loyal customer base, Tower Insurance produced gross written premiums of approximately NZD 170 million (USD 101 million) in 2003--about 10% of the personal lines market in New Zealand.
Offsetting these positive rating factors are the company's significant amount of profit repatriations and less conservative asset mix.
Due to the dividend requirements by Tower Limited, the ability for Tower Insurance to generate internal surplus growth is limited. Even excluding the significant dividend payment in 2003, the company's five-year dividend payout ratio still stands at a level of more than 70%.
In 2003, the internal capital reallocation within the Tower Group exposed Tower Insurance to greater equity risks. Given the short-tail nature of its underwriting portfolio, an investment portfolio with more than 40% in equities and properties risks is considered to be somewhat aggressive.
Due to the continued business restructuring and persistent operational risks at Tower Limited, A.M. Best will monitor closely Tower Limited's performance and ability to meet its senior debt obligations, including future funding requirements of Tower Insurance.
A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source.
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