-AM Best downgrades ratings of New Zealand's LAPP.
BANKING AND CREDIT NEWS-February 15, 2011--AM Best downgrades ratings of New Zealand's LAPP(C)2011 M2 COMMUNICATIONS http://www.m2.com
15 February 2011 - AM Best downgraded Monday to B++ (good) from A (excellent) the financial strength rating (FSR) and to "bbb" from "a" the issuer credit rating (ICR) of New Zealand Local Authority Protection Programme Disaster Fund (LAPP).
The ratings have been removed from under review with "negative" implications and assigned a "negative" outlook.
The ratings reflect LAPP's high net retention of risk and the resulting weak stressed risk-adjusted capitalisation, as measured by Best's Capital Adequacy Ratio (BCAR), as well as its limited opportunity to raise premiums in a relatively price sensitive market, the service specified.
The Canterbury earthquake has caused LAPP to lose more than half of its equity, as net retention is relatively high. LAPP has reduced its exposure for the remainder of the year through the use of reinsurance; however, net retention is still considered high, according to the analysts. As a result, LAPP's catastrophe stressed BCAR is weak.
While LAPP caters only to the local government and its subsidiaries, the company's local authority members have no obligation to insure with the fund. While there is limited potential growth in its membership base, LAPP also faces competitive pressures if it tries to enact large re-pricing, AM Best added.
Offsetting these rating factors are LAPP's stable membership base and moderate risk-adjusted capitalisation, as measured by BCAR.
LAPP's membership base has gradually increased since its inception, as the fund offered an attractive proposition of stable premium rates for members that is cheaper in the long term as LAPP does not pay tax or commissions and is not profit driven. The stable membership base has facilitated the gradual growth of LAPP's equity base, and in the analysts' view, this trend is anticipated to continue in the near term.
While LAPP's BCAR deteriorated significantly as a result of the 2010 Canterbury earthquake, the ratings take into account the ability of LAPP to quickly accumulate its surplus, AM Best elaborated.
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