The rating agency has assigned a financial strength rating of B (Fair) and an issuer credit rating of "bb+" to The Pinnacle Life Insurance Partnership. The outlook assigned to both ratings is stable.

The assigned ratings reflect Pinnacle's direct distribution capabilities, comparatively low lapse ratios and favorable reinsurance arrangements, AM Best says.

Pinnacle mainly underwrites simple life insurance in the no-frills term life segment of the New Zealand market, relying primarily on direct distribution.

The company's direct distribution capabilities have been enhanced by its online underwriting platform, which generated the majority of its new policies in the past five years. Growing at around 21% annually, Pinnacle's gross written premiums outpaced the market in the five years to March 31, 2012 (according to unaudited accounts).

Pinnacle has established a niche in its targeted market segment. This is reflected in its lapse ratio, which has been maintained below the market average.

Pinnacle's risk-adjusted capitalisation and net benefits to net premiums written ratio are significantly supported by its reinsurance arrangements. These significantly reduce retained underwriting risk and contribute to keeping its net claims at a low and stable level.

Offsetting rating factors include Pinnacle's high expense ratio and the high proportion of net policy assets on its balance sheet.

"Direct distribution expenses, such as advertising, have been considerable," AM Best says. "Pinnacle's expense ratio exceeded 100% over the past five years. Management is aware of the need to control expenses."

The ratings agency says as a large proportion of the company's expenses are related to advertising.  It anticipates that Pinnacle will have the ability to reduce its expenses going forward.

Net life policy assets and movements have accounted for the majority of Pinnacle's reported earnings and net assets (89% of net assets as of March 31, 2012 according to unaudited accounts).

"This is a strain on its risk-adjusted capitalisation as the value of net life policy assets depends on retaining inforce policies. Management is contemplating raising capital from new investors. This could, potentially, significantly strengthen Pinnacle's risk-adjusted capitalisation by reducing net life policy assets relative to reported capital."

AM Best plans to review Pinnacle's ratings after the completion of the planned capital injection.

"A substantial reduction in the proportion of Pinnacle's net life policy assets to reported capital could lead to upward rating actions. However, a negative deviation to the company's forecast adjusted policyholder surplus could lead to downward movement on the ratings."