Best Affirms Rating for AMI Insurance

October 14, 2005

A.M. Best Co. has affirmed the financial strength rating of A (Excellent) of AMI Insurance Limited (AMI) (Christchurch, New Zealand). The rating outlook remains positive.

The rating reflects AMI’s stable underwriting performance, continued growth of capitalization, strong distribution capacity and liquid investment portfolio. The rating is based on an analysis of the consolidated financial accounts of the AMI Members Trust, of which AMI Insurance Limited is the only operating entity.

AMI has established a solid market position in personal lines insurance in New Zealand’s non-life market as a result of its long operating history. Its strong market presence is underpinned by its broad distribution network, with 67 branch offices located throughout New Zealand. As one of the leading insurers in personal lines, AMI captured about 8% of the non-life market share in 2005.

AMI has consistently maintained underwriting profitability, notwithstanding significant claim costs arising from the flooding events in the past two years. AMI lowered its loss ratio from 72% in 2002 to 64.2% in 2005, reflecting its stringent underwriting controls.

The company has a highly liquid investment portfolio, with cash, short-term instruments and fixed income securities representing more than 60% of its total assets in 2005. This prudent investment mix has enabled the company to generate a stable stream of investment earnings. Solid underwriting results along with a stable investment yield have further reduced the overall operating ratio to 78.5% in 2005 from 81.0% in 2004.

AMI continues to strengthen its capital base and solvency margin through retention of earnings. Growth in internal surplus improved the company’s solvency margin from 79.9% in 2001 to 96.4% in 2005. AMI’s capital and surplus recorded an average growth of 13.8% over the past five years. Prospectively, the continued presence of retained operating surplus is expected to further enhance AMI’s capitalization on a risk-adjusted basis in the near term, as measured by the Best’s Capital Adequacy Ratio (BCAR).

Offsetting these positive rating factors is catastrophic risk exposure, higher claim deductibles in the property catastrophic reinsurance program and intense market competition.

AMI, as a short tailed insurer focusing on motor, is exposed to natural perils such as floods and earthquakes. Although the company seems reasonably well protected under the extensive reinsurance arrangements, an increase in claim deductibles in the property catastrophic reinsurance program in 2005 could produce volatility for AMI’s underwriting profitability.

As a result of its business focus on the personal lines, the company’s long-term growth potential lies in the future population growth rate in New Zealand.

Additionally, strong market competition could challenge AMI’s capability to achieve a higher level of market presence in the personal lines market in New Zealand over the mid to long term.

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