A.M. Best Company, the international credit rating agency specialising in insurers, has reviewed its ratings on three New Zealand entities this week with good news for one and bad news for the other two.
It has improved its outlook on Auckland-based credit surety and financial risk provider CBL Insurance, but placed its ratings on New Zealand Local Government Insurance Corporation (Civic Assurance) under review with negative implications highlighting a potential dispute with its reinsurers. Thirdly, A.M. Best has downgraded its ratings on ACS (NZ) Ltd, formerly Ansvar, highlighting "near-term regulatory risk" as the insurer that insured the Christchurch Cathedral undertakes a policyholder approved managed withdraw from New Zealand.
A.M. Best revised its outlook on CBL to positive from stable and affirmed the financial strength rating of B+ (Good) and issuer credit rating of bbb-. A B+ financial strength rating is regarded as secure - as opposed to vulnerable - and a bbb- issuer credit rating is A.M. Best's lowest investment grade rating.
A.M. Best's improved outlook for CBL, formerly known as Contractors Bonding Ltd, contrasts with that of rival credit rating agency Standard & Poor's, which dropped CBL two notches to BB- with a negative outlook from BB+, its highest speculative, or junk, rating, in June.
A.M. Best says its moves are based on an improving underwriting performance from CBL and the expected favourable movement of the financial strength of the firm.
"The ratings also consider CBL’s acquisition (on June 1, 2011) of European Insurance Services Limited (EISL), an underwriting agency that gives CBL greater access to a desirable book of European business," A.M. Best says.
CBL bought EISL, which provides residential builders warranty insurance in France and Spain, for €22 million (just under NZ$34 million at today's exchange rate) in June last year in a deal funded through NZ$20 million of loans from BNZ and fellow National Australia Bank subsidiary, Britain's Clydesdale Bank, the issue of NZ$9 million worth of CBL shares, and a €5 million earn-out to EISL shareholders payable over three years.
Following the S&P downgrade Carden Mulholland, CBL's chief financial officer, told interest.co.nz residential building permits had been increasing steadily in France, and the election of a Socialist government was likely to be good news for CBL with "more and more social housing than ever" expected to be built. Mulholland said CBL writes very little business in Spain. However, about 80% of CBL's business is now in Europe.
"Key rating drivers that could lead to an upgrading of CBL’s ratings are a stable underwriting performance and stronger capital position over the next few years," A.M. Best said.
In contrast, downward rating pressures could occur if CBL can't reach its underwriting profitability or the financial strength of CBL falls short of A.M. Best’s expectations. Another rating factor that could trigger a downgrade is the local solvency ratio of CBL falling below the regulatory minimum.See A.M. Best's full statement on CBL here.
Civic Assurance's 'potential dispute' with reinsurers
Meanwhile, A.M. Best Placed under review - with negative implications - and affirmed its financial strength rating of B++ (Good) and issuer credit rating of bbb+ on Civic Assurance.
"The rating actions largely reflect Civic Assurance’s potential dispute with its reinsurers," A.M. Best said.
"Although the company’s balance sheet was enhanced by a capital injection in February 2012, the prospective risk-adjusted capitalization could be stressed by the possibility of some of its reinsurance recoverable balances being uncollectible. A.M. Best will revisit the under review status once more information becomes available. Negative rating actions could occur if there is a sizable decrease in Civic Assurance’s net assets."
Following A.M. Best's move Civic Assurance's CEO Tim Sole told BusinessDesk it was normal for reinsurers to check the company's level of cover and to ensure payments to local authorities were correct.
"They want to be sure we're not over-paying. It's just a precautionary thing. "I think everything's going to be fine," Sole said.
See A.M. Best's statement on Civic Assurance here.
ACS downgraded to 'vulnerable' and sub investment grade
A.M. Best also downgraded its financial strength rating on ACS two notches to the "vulnerable" rating of B- (Fair) from the "secure" rating of B+ (Good). It also dropped its issuer credit rating to the non-investment grade rating of bb- from the investment grade rating of bbb-. The credit rating agency said both ratings have been placed under review with developing implications, reflecting ACS’ near-term regulatory risk.
"These rating actions acknowledge ACS’ risk-adjusted capitalization and its separation from (British parent) Ecclesiastical Insurance Office plc (EIO) as well as the potential vulnerability of ACS’ capital position," A.M. Best said.
ACS' policyholders last month approved a scheme of arrangement intended to effect a managed withdrawal from New Zealand by the church, heritage building and rest home insurer with its directors remaining in control. Approval for the insurer's scheme, after it was hard hit by the February 22, 2011 Christchurch earthquake, was also gained from Justice Geoff Venning in the High Court at Auckland despite concerns raised by the Reserve Bank, the new prudential regulator of the insurance sector.
A.M. Best said ACS’ current risk-adjusted capitalisation remains stressed as reinsurance recoverable risk remains a significant drag.
"Adverse development to the February 2011 earthquake cost estimates and slower than anticipated claims settlements during the first half of 2012 have resulted in a higher than anticipated level of reinsurance recoverable risk as of June 30, 2012. ACS’ Scheme of Arrangement and the transfer of its majority ownership away from EIO remove the likelihood of any further financial support from EIO. This leaves ACS’ capital position vulnerable to any further increases in claims estimates, especially if these develop beyond ACS’ extended reinsurance coverage (NZ$570 million), which could weaken ACS’ ability to fully meet policyholder claims," A.M. Best said.
Furthermore, it said ACS faces near-term regulatory risk.
"A.M. Best was informed by ACS that it has yet to submit its final solvency calculations as of June 30, 2012 to the Reserve Bank of New Zealand. It remains to be seen whether the Reserve Bank will view ACS’ final solvency calculations as compliant. A.M. Best has sighted the draft calculations the company has lodged with the Reserve Bank. While these show a positive regulatory solvency margin, it is thin and the Reserve Bank has publicly voiced concerns on ACS’ regulatory solvency."
"Partially" offsetting these negative rating factors are anticipated cash settlements by ACS of major claims by December 31, this year. ACS' management has told A.M. Best it reached agreement on cash settlement amounts, totaling about NZ$366 million, with major policyholders.
"This could lead to a significant reduction in reinsurance recoverable risk by December 31, 2012 and an improvement in risk-adjusted capitalization."
"Also, an agreed cash settlement of major claims would reduce the impact and likelihood of any further adverse claims cost development and would help to protect the company’s capital position. Developments that could result in negative rating actions include negative regulatory action, a slower than anticipated reduction in ACS’ reinsurance recoverable risk and erosion of its capital position," A.M. Best added.
See A.M. Best's full statement on ACS here.
An A.M. Best financial strength rating is its opinion of an insurer's financial strength and ability to meet its ongoing insurance policy and contract obligations. It's based on a comprehensive quantitative and qualitative evaluation of a company's balance sheet strength, operating performance and business profile, the credit rating agency says. Its issuer credit ratings are described as an opinion of an issuer/entity's ability to meet its ongoing senior financial obligations, based on a comprehensive quantitative and qualitative evaluation of a company's balance sheet strength, operating performance and business profile.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.