Rating agency alert for Tower

New Zealand insurance company Tower, and its subsidiaries, received a warning from rating agency A.M. Best yesterday as its outlook was revised to negative from stable in the wake of the Wellington earthquakes.

Tower said in a statement the revision was because of industry-wide Canterbury claims cost inflation and volatility and noted that its other ratings were affirmed as excellent in three cases and good in one.

Craigs Investment Partners broker Greg Easton said the revision was a ''shot across the bows'' for Tower.

''A.M. Best is saying that if things get worse, or there is another earthquake, they will be looking at Tower with the possibility of being revised down,'' he said.

A.M. Best senior analyst Ken Chow said cost estimates for the February 2011 earthquake exceeded the amount available for reinsurance protection in September 2012 and had continued to increase - contributing to a capital reduction in March 2013.

''The resulting stress to Tower'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 Tower's financial strength.''

Tower's ability to inject capital into Tower Insurance would likely decline as Tower Insurance would be the only significant earnings generator after the sale of its affiliates and given Tower's dividend policy payout ratio guidance of at least 90% of net after-tax profits, Mr Chow said.

Other than adjustments related to the February 2011 Christchurch earthquake, Tower Insurance's underwriting had shown good profitability, especially its motor portfolio. Tower Insurance had continued to increase its revenue over the past five years and had maintained its market share - despite losing a large distribution partner in 2009 - by strengthening sales through its own channels.

The affirmation of parent Tower's rating reflected its supportive risk-adjusted capitalisation, high-quality investment portfolio and favourable track record of profitability, Mr Chow said.

''These positive rating factors are partially offset by Tower's distribution concentration using brokers as well as its recently underlying earnings volatility associated with lapse experience,'' Mr Chow said.

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