Best Affirms Ratings of New Zealand’s Tower Insurance; Outlook Stable

June 2, 2005

A.M. Best Co. announced that it has affirmed the financial strength rating of “A-” (Excellent) of new Zealand’s Tower Insurance Limited and the issuer credit rating (ICR) of “bbb-” of Tower Limited. The outlook for both ratings has been revised to stable from negative.

“The ICR for Tower Limited reflects the group’s satisfactory capitalisation, the restoration of its overall profitability and its strong business profile in New Zealand insurance markets,” said Best. “The revision of the outlook reflects the continued improvement in operating performance of one of Tower Limited’s key operating entities, Tower Australia. Tower Australia has shown significant progress in controlling expenses, reducing lapse rates and improving the sales of its new risk business.”

Best noted: “In an attempt to achieve growth through re-focusing its resources on core business, Tower Limited spun off its Australian Wealth Management business in early 2005. A.M. Best views this spin off as favorable because it will further enhance the group’s financial flexibility. Prospectively, the group’s business in Australia will continue to face challenges from other life insurers with strong distribution capacity.

“Tower Insurance’s financial strength rating reflects its adequate risk-adjusted capitalisation, consistent investment earnings, well-established local presence in New Zealand and the South Pacific Islands and its extensive distribution network. The change in outlook recognizes the turnaround in operating performance of Tower Australia, which provides a higher level of financial flexibility for the group as a whole.

“Tower Insurance has established a strong presence in New Zealand, capturing approximately 9 percent of market share in the personal lines non-life market and 5 percent of market share in the total non-life market.”

Best also indicated that according to its Capital Adequacy Ratio model “Tower Insurance is adequately capitalized on a risk-adjusted basis. Strong investment earnings as a result of a better investment environment contributed favorably to the profitable position of the company, greatly offsetting the losses resulting from a series of flooding events in 2004 and the write-down on Tower Insurance’s IT system.”

The rating agency noted, however, that “a continued increase in the net underwriting leverage ratio, a high dividend payment, less conservative asset mix and catastrophic risk exposure,” constitute offsetting factors.

“Tower Insurance’s net underwriting leverage shows an upward movement. Its net earned premiums to adjusted capital and surplus increased to 1.88 times in 2004 from 1.66 times in 2003,” Best explained. “A relatively high dividend payout requirement has limited the growth of the company’s internal surplus. Growth in premiums, along with low retention of earnings, is expected to add pressure to the company’s risk-adjusted capitalisation in the near term.”

Best also noted: “Tower Insurance is financially vulnerable to the volatility of the equity market. Equities accounted for more than 40 percent of its investment assets in 2004, although the exposure to equity markets is matched to some extent by the required returns on its preference share capital.

“Additionally, though Tower Insurance is reasonably well protected under the reinsurance program, the presence of natural perils in New Zealand could negatively affect its profitability.”

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