A.M. Best Affirms Ratings of Tower Limited and Its Subsidiaries

HONG KONG--(BUSINESS WIRE)--A.M. Best Co. has affirmed the issuer credit rating (ICR) of “bbb-”of TOWER Limited. At the same time, A.M. Best has affirmed the financial strength rating of A- (Excellent) and ICR of “a-” of TOWER Limited’s subsidiaries, TOWER Insurance Limited, TOWER Health & Life Limited (THL) and TOWER Life (N.Z.) Limited (TLNZ). The outlook for all ratings is stable. All companies are domiciled in New Zealand.

The ratings reflect the group’s continued operating profitability and strengthened risk-adjusted capitalization.

TOWER Limited’s after-tax earnings from continued operations increased to NZD 50.1 million in 2009 from NZD 40.5 million in 2008. The notable improvement in operating performance was supported by profit growth in all three business units: general insurance, health and life, and investments. In the first half of fiscal year 2010, the group’s net profit after tax from continued operations was NZD 28.1 million, compared to NZD 26.6 million for the same period in fiscal year 2009. Prospectively, A.M. Best expects that TOWER Limited’s operating performance will remain favorable as consistent operating profitability from general insurance business and strong organic growth from health and life business will continue to support the group’s operating profitability.

The group’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), improved in 2009 predominately due to an issue of new shares through a rights issuance. The improvement also reflects the group’s conservative financial leverage and overall balance sheet strength. Although A.M. Best expects the group will continue to practice consistent earnings retention in the near term, potential capital demand from strategic opportunities and strong organic business growth will gradually offset the increase in the group’s capitalization.

In terms of general insurance, TOWER Insurance Limited's operating earnings increased to NZD 16.7 million in 2009 from NZD 14.8 in 2008, predominantly due to its improving underwriting result and solid investment performance. As a result of the company’s gradual improvement in underwriting performance, its underwriting-to-investment-income ratio has consistently increased over the past five years from 8.3% to 118.5%. The company’s five-year average combined ratio was 95.0% over the same period. The stability in TOWER Insurance Limited's underwriting profitability coincides with the steady improvement in policy lapse rates, stable loss experience and the ongoing control of underwriting expenses. Prospectively, A.M. Best anticipates TOWER Insurance Limited’s operating margins to remain stable as solid investment earnings and consistency in its underwriting margin will continue to support its operating profitability.

The capitalization of THL, which underwrites the health and individual life business of the TOWER group, strengthened in fiscal year 2009 primarily due to accumulation of retained earnings over the fiscal year. While THL has grown its premium volume moderately over the year, it has reduced management expenses and therefore enjoyed higher underwriting margins. The company’s risk-adjusted capitalization, as measured by the BCAR, is anticipated to strengthen further in the current fiscal year as its business remains profitable and its risk profile remains stable.

TLNZ, which predominantly writes group life business, was capitalized adequately for its rating level in 2009. The company’s risk-adjusted capitalization, as measured by the BCAR, strengthened in fiscal year 2009, following strong growth in its group risk portfolio. However, TLNZ recorded the lowest net profit in the five years under review predominantly due to declines in investment earnings; profits flowing out of the closed book of participating business have somewhat stabilized earnings. As expected investment earnings have declined from previous levels, TLNZ’s earnings are anticipated to remain at similar levels going forward.

The positive rating factors are partially offset by TOWER Insurance Limited’s weakened capitalization, TLNZ’s low absolute capitalization, the strong competition faced by THL and the uncertain implications of the change in taxation laws.

Despite the continual improvement in operating performance, TOWER Insurance Limited's risk-adjusted capitalization weakened primarily due to the repatriation of capital by its holding company, TOWER Limited. Although asset risk slightly decreased in 2009, an increase in underwriting risk and the decline in capital and surplus contributed to the weakened BCAR when compared to the previous year and its peers. Nonetheless, TOWER Insurance Limited’s risk-adjusted capitalization remained supportive of its rating level.

The absolute capitalization of TLNZ is small, especially when compared with similarly rated life companies in New Zealand. This may raise issues such as scale and operating capabilities. Being part of the TOWER group mitigates these concerns, as TLNZ accesses group resources in the running of its business.

Partially as a consequence of strong competition, THL's policy count in health insurance has been steadily declining over the past five years. Increasing total premium due to an aging population obscures this issue. In addition to deteriorating lapse experiences, THL has experienced higher claims in its health portfolio and high commission expenses.

The magnitude of the impact of the legislated tax changes on the group’s health and life business strategy is currently unknown; however, it is anticipated that insurers with higher tax buffers will be in a position to absorb the effects of higher taxation for longer periods.

For Best’s Credit Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.