Best Assigns Ratings to New Zealand’s Pacific International

June 15, 2006

A.M. Best Co. has assigned a financial strength rating of “B+” (Very Good) and an issuer credit rating of “bbb-” to New Zealand-based Pacific International Insurance Limited (PII) with a stable outlook.

“The ratings reflect PII’s profitable operations, improving risk-adjusted capitalization and relatively conservative reserving,” said Best. The rating agency also indicated that it believes “PII’s underwriting discipline and relatively conservative investment strategy will contribute to the company’s financial stability.

“PII has had a short but profitable history,” Best’s report continued. “Apart from the loss in the first year of operations in 2002, operations to date have contributed to shareholder surplus. Return on equity was 58 percent in fiscal year 2005. Loss ratios have declined substantially since inception; however,” Best noted that it “expects losses to increase as the book matures. Expenses have been increasing but are expected to stabilize at the current levels. The combined ratio was 75 percent in 2005.

“PII’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio, improved significantly in 2005. This was due primarily to significant strengthening of capital and surplus. PII’s risk-adjusted capitalization is expected to strengthen considerably in 2006 due to strong earnings and the release of reserves. The stability of the assigned ratings is contingent upon PII meeting profitability and capitalization forecasts.

“The company had a liquid and relatively conservative investment portfolio in 2005, with approximately 63 percent of assets invested in cash. The investment income ratio was 10.7 percent in fiscal year 2005 compared to 6.8 percent in fiscal year 2004.”

Best cited PII’s exposure in the event of large claims, its short operating history and relatively small underwriting book as “partially offsetting these positive factors.”

Best explained that “PII’s reinsurance is structured on an excess of loss basis, with a relatively high retention per claim. Although highly unlikely, significant negative developments could potentially affect PII’s financial stability.” Best added, however that it “gains comfort from the fact that historical large losses have not been significant enough to trigger reinsurance claims.

“PII’s operating performance remains uncertain as a result of its short operating history. Further, the company’s small underwriting book could result in volatile underwriting profitability. PII’s current conservative loss reserving methodology somewhat mitigates these concerns. As such, A.M. Best views the ongoing adequacy of reserves as crucial.”

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