A.M. Best Co. has downgraded the financial strength rating to B- (Fair) from B+ (Good) and issuer credit rating to "bb-" from "bbb-" of ACS (NZ) Limited (New Zealand).
According to a release on July 17, both ratings have been placed under review with developing implications, which reflects the company's near-term regulatory risk.
These rating actions acknowledge ACS' risk-adjusted capitalization and its separation from Ecclesiastical Insurance Office plc (EIO) (United Kingdom) as well as the potential vulnerability of ACS' capital position.
Following the recently approved Scheme of Arrangement, EIO has strengthened ACS' capital position. Also, EIO is providing additional reinsurance cover (to extend the cover up to NZD 570 million) to extend reinsurance protection for the February 2011 earthquake event.
However, ACS' current risk-adjusted capitalization 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. 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 (NZD 570 million), which could weaken ACS' ability to fully meet policyholder claims. The company 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, to the Reserve Bank of New Zealand (RBNZ). It remains to be seen whether the RBNZ will view ACS' final solvency calculations as compliant. A.M. Best has sighted the draft calculations the company has lodged with the RBNZ. While these show a positive regulatory solvency margin, it is thin and the RBNZ 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, since the company's management recently informed A.M. Best that it reached agreement on cash settlement amounts (totaling around NZD 366 million) with major policyholders. This could lead to a significant reduction in reinsurance recoverable risk by December 31, 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.
The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides an explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: "Understanding Universal BCAR." Best's Credit Rating Methodology can be found at ambest.com/ratings/methodology.
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