Ratings Roundup: Tower Group (NZ), Grupo Mexicano

July 31, 2013

A.M. Best Asia-Pacific Limited has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A’- (Excellent) and issuer credit ratings (ICR) of “a-” of TOWER Insurance Limited (TIL), TOWER Health & Life Limited (THL) and TOWER Life (N.Z.) Limited (TLNZ). Best also has revised the outlook to negative from stable and affirmed the ICR of “bbb-” of the parent holding company, TOWER Limited (TL). All of the companies are domiciled in New Zealand. Best explained that the “revised outlook for TIL’s ratings reflects its continued outstanding claims cost escalation and volatility in its financial strength, as measured by Best’s Capital Adequacy Ratio (BCAR). Cost estimates (other allowances for risk margins and inflationary pressures) for the February 2011 earthquake exceeded the amount available for reinsurance protection in September 2012, and has continued to increase; thus, contributing to a capital reduction in March 2013. The resulting stress to TIL’s financial strength has been removed through parental capital injections; however, the risk of further claims cost escalation remains. A large catastrophe combined with continued cost escalation could result in significant volatility to TIL’s financial strength. TL’s ability to inject capital into TIL will likely decline as TIL will be the only significant earnings generator following the disposal of its affiliates and given TL’s dividend policy payout ratio guidance of at least 90 percent of net after tax profits.” Best also indicated that “other than adjustments related to the February 2011 earthquake, TIL’s underwriting has shown good profitability, especially in its motor portfolio. TIL has continued to grow its topline in the past five years and has maintained its market share (despite losing a large distribution partner in 2009) by strengthening sales through its own channels.” In accordance with that analysis, Best said the “affirmation of THL’s ratings reflects its supportive risk-adjusted capitalization, high quality investment portfolio and favorable track record of profitability. These positive rating factors are partially offset by THL’s distribution concentration using brokers, as well as its recent underlying earnings volatility associated with lapse experience. The revised outlook for THL’s ratings recognizes Best’s concerns that capital requirements at TIL could result in lower earnings retention at THL. The rating affirmations for TLNZ acknowledge its profitable operating performance, conservative investment strategy and risk-adjusted capitalization. These positive rating factors are offset by TLNZ’s track record of high dividend payouts over the past five years, any potential impact due to the sale of its profitable group risk business and its low absolute capitalization compared to its similarly rated peer group. The revised outlook for TLNZ’s ratings reflects Best’s concerns with a declining trend in its risk-adjusted capitalization, and similar to THL, that capital requirements at TIL could result in lower than expected earnings retention.” The ratings report also noted that THL and TLNZ are awaiting regulatory approval to sell most of their non-participating policies to another life insurer. Once the sale is completed, the ratings of THL and TLNZ will be re-visited. The ratings of TL recognize the standard notching from its primary operating entity, TIL.” In conclusion Best said: “Positive rating movement for these four companies is presently unlikely. However, if deterioration and/or volatility should occur to their BCAR (especially TIL’s) it could result in negative rating movement.”

A.M. Best Co. has assigned a financial strength rating of ‘B++’ (Good) and an issuer credit rating of “bbb” to Grupo Mexicano de Seguros S.A. de C.V., both with stable outlooks.The ratings reflect “GMX’s profitable net results and adequate risk-based capitalization as well as initiatives to improve its operating performance,” Best said. “GMX’s consistent levels of positive investment income have resulted in historically favorable earnings that have enabled it to continue to increase its level of surplus. GMX’s financial strength is further enhanced by its comprehensive reinsurance program and strong liquidity and solvency metrics. Based on Best’s Capital Adequacy Ratio (BCAR), GMX’s capitalization is at an adequate level to support its assets and underwriting risks.” The report also noted that “GMX has shown disciplined underwriting in a highly competitive market, while its risk-based capitalization remains fully supportive of its current ratings and outlook. GMX’s profitability is complemented by consistent levels of investment income, which has enabled it to steadily increase surplus.” As partial offsetting factors Best cited “GMX’s limited financial flexibility, geographic concentration of its business exclusively in Mexico and losses stemming from its property/casualty book of business. GMX’s business concentration makes it vulnerable to regulatory, economic and political influences and volatility. Moreover, GMX will remain challenged to increase its market share while generating consistent earnings in a very competitive and maturing market. Also, the frequency of catastrophic events in the Caribbean presents a substantial level of risk exposure to GMX as it formalizes its risk management program.” In conclusion Best said: “Potential positive rating triggers would include sustained improvement in GMX’s underwriting results in conjunction with tangible improvements in the Mexican regulatory environment and other country risk metrics. Possible negative rating triggers would include deterioration in the company’s underwriting results; and consequently, a decline in its risk-based capitalization.”

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