Best Affirms FSR for Accident Compensation Corp.

A.M. Best Co. has affirmed the financial strength rating of A+ (Superior) of Accident Compensation Corporation (ACC) (New Zealand). The rating outlook is stable.

The rating reflects ACC’s unique status in the accident insurance market in New Zealand, improvement in underwriting performance, stable investment yield and commitment to achieving fully funded status. The rating also considers the New Zealand government’s support of ACC’s unfunded liabilities.

As a government-owned entity operating under the Injury Prevention, Rehabilitation and Compensation Act 2001, ACC is the sole personal accident insurance provider in New Zealand. ACC significantly improved its underwriting performance by lowering its loss ratio to 74.1% in 2004 from 130.3% in 2003.

The company’s investment portfolio, which has been acting as an earnings stabilizer, generated a net investment income of NZD 489.4 million (USD 309 million) in 2004 as compared to NZD 437.0 million (USD 276 million) in 2003.

Despite the presence of the net surplus of NZD 875.9 million (USD 553 million) in 2004 and the change of setting levies from a “pay-as-you-go” approach to a fully funded basis, ACC still experienced a NZD 3.4 billion (USD 2.1 billion) reserve shortfall in its long-tailed actuarial liabilities in 2004.

Nonetheless, A.M. Best recognizes the support of its unfunded liabilities by the New Zealand government and ACC’s commitment to become fully funded through earnings contributed from investments, premium pricing and tail levies.

Offsetting factors include the lack of catastrophe reinsurance coverage and volatile underwriting experience. Movement of the claims provision has resulted in significant underwriting volatility. Without catastrophe reinsurance coverage, ACC could be financially vulnerable to any potential claims arising from any unforeseeable natural perils.

Additionally, ACC’s rating is based on the expectation of the continued support by the New Zealand government. The company’s market profile could be challenged by a change in legislation, although the risk is minimal.