Best Affirms FSR for New Zealand’s Accident Compensation Corp.

A.M. Best Co. has affirmed the financial strength rating of A+ (Superior) and assigned an issuer credit rating (ICR) of “aa” to Accident Compensation Corporation (ACC) (New Zealand). The outlook for both ratings is stable.

The ratings reflect ACC’s status as a Crown entity in New Zealand and its right to operate as the sole provider of personal accident insurance. The ratings also recognize the Corporation’s quality investment portfolio and commitment to achieve fully funded status.

The Injury Prevention, Rehabilitation, and Compensation Act 2001 charges ACC with providing a fair and sustainable scheme for managing personal injury. This gives ACC greater latitude in setting levies to achieve its commitment of fully funded status by June 30, 2014.

A net loss of NZD 794 million (USD 555 million) in fiscal year 2005 contributed to a reserve shortfall of NZD 4.2 billion (USD 2.9 billion). However, A.M. Best recognizes the support of ACC’s unfunded liabilities from the New Zealand government.

A.M. Best views favorably ACC’s relatively conservative investment portfolio. This has acted as an earning stabilizer, generating a net investment income of NZD 776.8 million (USD 543 million) for ACC in fiscal year 2005.

Offsetting these positive rating factors are the company’s volatile underwriting results, lack of catastrophe reinsurance coverage and the risk of a change in legislation. Without catastrophe reinsurance coverage, ACC is vulnerable to any potential claims arising from unforeseeable catastrophe events.

ACC’s underwriting performance significantly deteriorated in fiscal year 2005. This decline was predominantly due to the impact of interest rates on liability valuation. The corporation’s claim liability reserve adjustments are highly correlated with interest rate movements.

Finally, ACC’s rating is based on the expected continuation of legislated support by the New Zealand government.