Best Affirms China Ins. (NZ) Ratings

December 21, 2005

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

“The ratings reflect CINZ’s moderate risk-adjusted capitalization, conservative investment portfolio and relatively favorable loss experience,” said Best, also indicating that it “expects the recent investments CINZ has made 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. CINZ’s capital and surplus declined to NZD 2.995 million ($ 2.15 million) in fiscal year 2004 from NZD 3.6 million ($ 2.3 million) in fiscal year 2003. The net underwriting result was NZD -918 thousand ($ -651 thousand) in fiscal year 2004.

“CINZ has maintained a liquid investment portfolio with 41.2 percent of assets invested in cash, short-term deposits and government bonds. Given the short tailed nature of CINZ’s business, the asset mix greatly reduces liquidity risk.

“The company’s loss ratio has been consistently lower than the industry loss ratio. Its loss ratio was 61.5 percent in fiscal year 2004 compared to the industry ratio of 62.9 percent. CINZ’s five-year average loss ratio was 58.2 percent compared to the industry five-year average loss ratio of 64.9 percent.

“These positive factors are partially offset by the company’s volatile operating performance, the expected deterioration of its capitalization on a risk-adjusted basis and the strong market competition the company faces in New Zealand.

“Underwriting performance has been volatile. This volatility has predominantly been caused 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 44.6 percent.”

Best noted, however, that it “remains cautious about the company’s ability to sustain business growth with a secure level of capitalization. CINZ’s net premium leverage ratio improved to 1.58 times in fiscal year 2004 from 1.76 times in fiscal year 2003. However, this ratio is forecast to increase for the current year, as net premiums written have increased without a corresponding increase in capital.

“CINZ’s sole shareholder, China Insurance H.K. (Holdings) Company Ltd., advised A.M. Best that it has approved a capital injection of NZD 2 million ($ 1.4 million) into CINZ to support its business growth. The holding company will arrange the transfer of funds by 30 June 2006. The fulfillment of this pledge is critical to the future stability of the rating.

“Finally, premium rates have been softening over the current financial year. This will result in further pressure on CINZ’s bottom line.”

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