Best Assigns Ratings to New Zealand’s Tower Group

February 11, 2004

A.M. Best Co. announced that it has assigned an initial issuer credit rating of “bbb-” to Tower Limited and an “A-” (Excellent) financial strength rating to Tower Insurance Limited. It said the outlook for both of the New Zealand-based companies is negative.

“The ‘bbb-‘ issuer credit rating for Tower Limited reflects its successful recapitalization and profitable New Zealand operations,” said Best. “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.”

Best noted that 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 percent 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.”

The company’s long operating history in New Zealand, has enabled it to accumulate 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 percent of the personal lines market in New Zealand,” said Best.

The rating agency indicated that: “Offsetting these positive rating factors are the company’s significant amount of profit repatriations and less conservative asset mix.” It added that “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 percent.

“In 2003, the internal capital reallocation within the Tower Group exposed Tower Insurance to greater equity risks,” the bulletin continued. “Given the short-tail nature of its underwriting portfolio, an investment portfolio with more than 40 percent in equities and properties risks is considered to be somewhat aggressive.”

Best concluded that “Due to the continued business restructuring and persistent operational risks at Tower Limited,” it would continue to “monitor closely Tower Limited’s performance and ability to meet its senior debt obligations, including future funding requirements of Tower Insurance.”

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