Best Affirms NZ’s China Ins. Ratings

December 19, 2006

A.M. Best Co. has affirmed the financial strength rating of “B+” (Very Good) and the issuer credit rating of “bbb-” of New Zealand-based China Insurance (NZ) Company Limited with a stable outlook.

“The ratings reflect the company’s moderate capitalization, conservative investment portfolio and relatively favorable loss experience,” said Best. It also indicated that it “expects the recent investments in technology to improve underwriting efficiency.”

“The Best’s Capital Adequacy Ratio (BCAR), which measures capitalization on a risk- adjusted basis, indicates that the company is moderately capitalized,” the bulletin continued. “CINZ’s capital and surplus declined to NZD 2.438 million (USD 1.66 million) in fiscal year 2005 from NZD 2.995 million (USD 2.15 million) in fiscal year 2004. Despite suffering a net loss in fiscal year 2005, CINZ expects a breakeven result for fiscal year 2006.

“CINZ has maintained a liquid investment portfolio with 41.8 percent of total assets invested in cash, short-term deposits and government bonds. Given the short tail nature of CINZ’s business, the asset mix greatly reduces liquidity risk.

“CINZ’s loss ratio is consistently lower than that of the industry prior to 2005. The company’s loss ratio was 63.9 percent in fiscal year 2005 compared to 61.5 percent the prior year.”

However, Best cited “CINZ’s volatile operating performance, its reliance on parent company support and its moderate presence in New Zealand,” as offsetting factors. “Underwriting performance has been rather unstable. This volatility has been caused predominantly by fluctuating expenses. Notably, CINZ’s expense ratio has fluctuated between 28.1 percent and 63.8 percent in the past five years. The five year average expense ratio was 45.7 percent. High expenses for 2005 were due to IT investments. The amount of investments is expected to be similar for 2006.”

Best said it “remains cautious about the company’s ability to sustain its business growth with a secure level of capitalization. CINZ’s net premium leverage ratio deteriorated to 2.07 times in fiscal year 2005 from 1.58 times in fiscal year 2004. However, capital contributions in mid- 2006 have strengthened the company’s risk adjusted capitalization.

“Premium rates across the board have weakened over the year. In a competitive market environment, the rates on insurance products would most likely be in line with the market as the company lacks pricing power. The softening of premium rates will result in pressure on CINZ’s bottom line. As the company predominantly uses brokers, the effect of softening premiums will be quickly felt.”

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