Best Announces Rating Actions on NZ’s ‘Old’ & ‘New’ AMI Insurance

April 5, 2012

A.M. Best Co. announced rating actions on both New Zealand’s AMI Insurance Limited, or the old AMI, and AMI Insurance (Operations) Limited, or the new AMI, following a substantial restructuring of the company in the wake of the earthquakes which struck Christchurch, and the Canterbury region last year.

‘Old’ AMI
Best has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of AMI Insurance Limited (the old AMI), both with stable outlooks.

Best noted that “following the sale of its non-Christchurch earthquake-related portfolio to IAG (NZ) Holdings Limited on April 5, 2012, AMI Insurance Limited will change its name to Southern Response Earthquake Services Limited by close of business of the same day.

“The affirmations reflect the expected improvement in the old AMI’s risk-adjusted capitalization, its expected reduction in underwriting risk as well as continued government support and its anticipated status as a Crown entity.”

In addition Best indicated that it expects the anticipated sale of the old AMI’s non-Christchurch earthquake-related insurance business “to improve its risk-adjusted capital position. Underwriting risk will fall, as the company will cease writing new insurance policies from close of business of the same day.

“The financial government support that was put into place April 2011 will remain and continue to support the old AMI’s balance sheet. The company will become a Crown entity from April 5, 2012, as the New Zealand government will assume majority voting rights in the company,” which, Best said has “positive implications on the company’s risk-adjusted capitalization.”

As partial offsetting factors Best noted “old AMI’s high reinsurance receivable balances and continued uncertainties relating to the value of the claims estimates.” These are mostly due to the old AMI’s “remaining earthquake claims and associated reinsurance recoverable balances, the improvement of the old AMI’s risk-adjusted capitalization will be dependent on the pace at which the reinsurance receivable balances can be recovered. In addition, upward revisions to the claims estimates could negatively impact the company’s risk-adjusted capitalization.”

Best said it “considers that the old AMI is well placed for its current ratings.”

‘New’ AMI
Best has assigned a financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” to AMI Insurance (Operations) Limited, or the ‘new AMI, both with stable outlooks.

The rating actions follow the change in ownership, as AMI is now a fully owned entity of IAG (NZ) Holdings Limited (IAG), a subsidiary of Australian Insurer IAG. Best also noted that by the “close of business on April 5, 2012 NZT, the company will change its name from AMI Insurance (Operations) Limited to AMI Insurance Limited.”

Best explained that the ratings “reflect the new AMI’s expected capitalization and balance sheet strength following its change in ownership. The ratings also consider the potential synergies the new AMI will have, its status as a strategically important member of the IAG group, its historic underwriting profitability and strengthened reinsurance protection following the 2010/11 earthquakes.

“According to management’s business plan, the new AMI will be capitalized with NZD 120 million [US$98 million], following its change in ownership and will not carry any liabilities and reinsurance assets related to the 2010/11 Canterbury earthquake events.

“The new AMI’s strong market share in the personal lines market and historic underwriting profitability (except for the Canterbury earthquakes) is expected to considerably strengthen IAG group’s market share in New Zealand and could enhance its efficiencies and earnings. These strengths make the new AMI a strategically important member of the IAG group, which strengthens the new AMI’s financial flexibility.”

Best added that in view of the earthquake events between September 2010 and December 2011,”the new AMI’s catastrophe reinsurance has more than doubled, protecting the company’s balance sheet against losses between NZD 10 million [US$81.5 million] to NZD 1.4 billion [US$1.141 billion] in the year ending June 30, 2012, compared to NZD 5 million [US$4.075 million] to NZD 600 million [US$489 million} in the prior year.”

As partial offsetting factors, Best cited the “integration risk and potential changes in the new AMI’s earnings retention and capital growth. Should the new AMI’s integration into the IAG group disrupt staff morale and change underwriting practices, its underwriting profitability could deteriorate from its historic track record and lead to lower earnings retention and capital growth.

“Sustained improvement in the new AMI’s risk-adjusted capitalization could lead to upward movement on the assigned ratings. Significant negative deviation from the business plan that the new AMI’s management shared with Best, in particular, its expected capitalization of NZD 120 million, could lead to downward pressure on the ratings.”

Source: A.M. Best

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