Best’s News & Research Service - September 16, 2021 09:19 AM (EDT)
AM Best Affirms Credit Ratings of Foundation Life (NZ) Limited
- September 16, 2021 09:19 AM (EDT)
Singapore //BestWire// - AM Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” (Excellent) of Foundation Life (NZ) Limited (FLNZ) (New Zealand). The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect FLNZ’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.
FLNZ’s balance sheet strength assessment is underpinned by its risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), which remained at the strongest level as at fiscal year-end 2020. The company has maintained a prudent regulatory solvency position over recent years. This has been supported by appropriate asset-liability management on its interest rate exposed in-force life insurance portfolio, despite fluctuations in interest rates. A partially offsetting balance sheet factor remains the company’s moderate-sized absolute capital base, which exposes capital adequacy to potential volatility in the event of stressed scenarios. FLNZ’s balance sheet strength assessment also factors in a neutral holding company assessment, following a review of Foundation Life (NZ) Holdings Limited (FLNZH), which owns 100% of FLNZ. AM Best views FLNZH’s financial leverage as elevated, with this debt historically serviced through the upstreaming of earnings from FLNZ. However, AM Best considers the risk of material capital extraction from FLNZ to continue to service these debt obligations as being partially mitigated, given the strong alignment of interest between the group’s ultimate equity and debt holders.
FLNZ has a track record of adequate operating performance, with a five-year weighted average return-on-equity ratio of 7.9% (fiscal years 2016-2020). The company’s expense ratio has increased over the past few years due to costs associated with Project Scholar (a process aimed at restructuring the remaining insurance portfolio by undertaking a scheme of arrangement proposal for its policyholders) and reducing economies of scale, as the company’s run-off business continues to diminish in size. Prospectively, AM Best expects FLNZ’s operating performance metrics to remain at an adequate level over the near to medium term, despite potential expense burdens arising from future project costs and exposure to economic factors such as volatility in interest rates.
AM Best views the company’s business profile as limited given its position as a run-off life insurer and its moderate scale of operations in New Zealand. Since 2018, the company has engaged in executing Project Scholar. This would see existing FLNZ policyholders offered a cash buyout option, replacement cover with another New Zealand life insurer, or a combination of both. Execution of Project Scholar has taken longer than expected, partially due to prevailing market conditions including movements in interest rates, and disruption caused by the COVID-19 pandemic. As of September 2021, the proposed scheme remains subject to regulatory, legal and policyholder approvals. If successfully implemented, AM Best expects FLNZ to cease insurance activities.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best’s Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.
AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.