S&P Assigns ‘B-‘ Rating to New NZ Insurer Western Pacific

March 31, 2006

Standard & Poor’s Ratings Services announced that it has assigned its “B-” insurer financial strength and counterparty credit rating to New Zealand-based start-up nonlife insurance company Western Pacific Insurance Ltd. (WPIL). The outlook is stable.

“WPIL has identified niche markets that should provide a good prospective competitive position, although at this stage the rating reflects the company’s short operating record, its low capital base, a relatively small management team, and limited financial flexibility,” said S&P.

The report added: “Given its start-up status, the rating is moderated by reserving methodology limitations given the lack of history of claims experience, and accounting-related informational risk issues.

“In addition to the good prospective competitive position, positive rating factors include WPIL’s decision to outsource key insurance functions to external expertise, its established industry relationships, and the support of a sizeable reinsurance program.

“WPIL is a small insurer, providing property, casualty, and contingency insurance solutions to a client base largely overlooked by traditional participants. Its strong relationship with key distributors, limited competition in target segments, and a conservative reinsurance program so far have supported the insurer’s good premium growth.

“However, WPIL’s short operating record leaves it with a new book of business.” S&P credit analyst Derryl D’silva noted: “Given the insurer’s higher-risk appetite, Standard & Poor’s believes that WPIL’s management must search prudently for growth so as to build a sustainable financial profile.” The insurer has a low absolute capital base, and this is a key rating sensitivity. “While strong forecast growth increases pressure on capital, WPIL’s reinsurance program to cover 85 percent of its overall claim risk is conservative, and offers a reasonable degree of protection against the insurer’s capital base,” he added.

S&P also indicated that, being a start-up entity, “the insurer is reliant on internal capital generation to support its ongoing business growth. However, the insurer’s reasonably good cash flows in the year to date, and management’s intentions to increase its absolute capital base in the medium-term–in part through additional investors– could support WPIL’s ability to build a sustainable financial profile.

“Although a rating change is not expected in the short term, the rating could be upgraded if the company substantially increases its paid-up capital to a level that is more consistent with a higher rating category, coupled with sufficient reserves to adequately cover any outstanding claims. Conversely, the rating could be downgraded if the company experienced extreme volatility in its earnings, and if its financial resources were insufficient to meet any outstanding claims in full.”

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