Ratings agency A.M. Best has removed Tower Insurance Limited (TIL) from under review with negative implications and affirmed its financial strength rating of “A-“ (Excellent) and its long-term issuer credit rating (long-term ICR) of “a-.”
Concurrently, A.M. Best has removed Tower Insurance’s ultimate parent, Tower Limited (TL), from under review with negative implications and affirmed the long-term ICR of “bbb-”. The outlook assigned to these credit ratings (ratings) is stable.
According to A.M. Best, the ratings reflect Tower Insurance’s balance sheet strength, which the agency categorises as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).
On August 16, A.M. Best placed the ratings of Tower Insurance and Tower under review with negative implications due to the group’s relatively weak balance sheet strength for the rating levels.
“The major concern at that time was that the group’s balance sheet was very susceptible to the reserve risks in relation to the open claims for the Canterbury earthquakes and the dispute over an adverse development cover with Peak Re related to the February 2011 earthquake,” it said.
Since then, the group has completed a capital raise of approximately $65.3 million and, on February 02, Tower entered into a settlement agreement with Peak Re.
Although the settlement will result in an after-tax write-off of $15.6 million for fiscal-year 2018, A.M. Best said it expects the group’s balance sheet strength to remain very strong, given its strengthened capital base.
A.M Best also said Tower Insurance’s balance sheet strength assessment is very strong. However, despite its efforts to finalise outstanding Canterbury earthquake claims, approximately 300 claims remain open which could expose the insurer’s overall earning to considerable reserving risk.
“Excluding the impact associated with the Canterbury earthquakes, TIL’s current book of business has been generating positive operating profits over a five-year period,” it said. “This is underpinned by a profitable underwriting portfolio that consists mostly of short-tail personal lines insurance products.
“While the business has continued to grow, principally through its digital channels, management and sales expenses have remained relatively flat, resulting in a reduction in the expense ratio. A.M. Best believes the company’s strong focus on delivering profitable growth will help it maintain positive underwriting and operating results over time.
“A.M. Best views TIL’s ERM to be appropriate, based on the company’s current size and risk profile. This is supported by its strong focus on claims management, profitable underwriting and improving its operational efficiency. A.M. Best thus considers TIL’s risk management capabilities to be aligned appropriately with its risk profile.”
While positive rating actions are unlikely, downward rating pressure could result should there be a significant deterioration in Tower Insurance’s risk-adjusted capitalization or financial performance. Additionally, the ratings could be downgraded if there is material deterioration in the credit profile of its ultimate parent, Tower Limited, the agency added.