Best Affirms NZ’s Credit & General Insurance ‘A-‘ Rating

September 7, 2005

A.M. Best Co. announced that it has affirmed the financial strength rating of “A-” (Excellent) of New Zealand’s Credit & General Insurance Limited (CGIL), with a stable outlook.

“The rating reflects CGIL’s excellent and consistent underwriting and operating performance, prudent risk-adjusted capitalization and strong balance sheet liquidity,” said Best. “The rating also considers CGIL’s distribution arrangement with the Farmers retail chain (Farmers), one of the largest retail department stores in New Zealand.”

The report noted: “Fisher and Paykel Appliances Holdings (F&P) acquired Farmers’ finance business in late 2003; CGIL maintains its distribution capacity through a 20-year exclusive right distribution arrangement with Farmers. In spite of the change of ownership structure, CGIL, as a member of F&P, maintains its premium growth momentum, recording a growth of 6 percent in 2004.

“CGIL’s underwriting performance has been consistent for the past several years. Its average loss ratio over the past five years stands at 13.4 percent, reflecting its disciplined underwriting practices and excellent quality of the business it derives from Farmers. A low level of claims experience, along with a stable investment yield has resulted in a consistent stream of operating earnings.

“A high level of retained earnings contributed to the significant increase in CGIL’s capital and surplus in 2004. Its adjusted capital and surplus grew by 36.3 percent in 2004, compared to 14 percent in the previous year. The Best’s Capital Adequacy Ratio, which measures capitalization on a risk-adjusted basis, indicates that the company was strongly capitalized in 2004.

In addition, CGIL’s liquidity position remains strong as cash and deposits represented more than 86 percent of the company’s total assets as of March 31, 2005.”

Best indicated that CGIL’s “significant concentration of business risk, heavy reliance upon Farmers as its risk product distributor and vulnerability to the potential fluctuation in the lending activities in New Zealand’s consumer credit market,” were offsetting factors.
“As a result of its reliance upon Farmers as its core distribution channel, CGIL’s premium growth will be associated with the future operating performance of Farmers, of which F&P has no stake,” Best indicated.

Best said it “remains cautious about CGIL’s exposure to the cyclical nature of the consumer credit and loan market in New Zealand and the impact on the stability of CGIL’s operating results given its high level of business concentration on the consumer credit insurance line.”

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