Rating agency runs ruler over TOWER
Ratings agency AM Best has reviewed its ratings on TOWER and in this report provided more details of the company's performance and the risks it faces.
Monday, August 1st 2011, 9:36PM
AM Best has affirmed the financial strength rating of A- (Excellent) and issuer credit ratings (ICR) of "a-" of TOWER Insurance, TOWER Health & Life (THL) and TOWER Life (TLNZ).
The outlook for all ratings is stable.
TOWER's rating reflects the group's continued overall operating profitability and improved risk-adjusted capitalisation.
Its after-tax profits increased by 16% to $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 capitalisation by 9% to $441 million, and underwriting risk remained stable compared with the prior year. As a result, TOWER's risk-adjusted capitalisation improved in fiscal-year 2010.
Offsetting rating factors include concerns over TOWER'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's market presence could result in capital demand and weaken the company's risk-adjusted capitalisation.
The ratings of TOWER Insurance reflect its solid operating performance and improved risk-adjusted capitalisation. The ratings also consider the potential support in capital management by TOWER. The company's fiscal-year 2010 net income increased by 31% to $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's absolute capitalisation. Lower net premium leverage resulted in a decline of underwriting risk; consequently, risk-adjusted capitalisation strengthened over the year. Support from TOWER could help to offset potential negative rating factors that could weaken the company's risk-adjusted capitalisation going forward.
The negative rating factors for TOWER Insurance 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 capitalisation. 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 recognise 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 capitalisation, 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 capitalisation 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 capitalisation, 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 capitalisation significantly deteriorating due to a dividend payment of $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.
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