SINGAPORE--(BUSINESS WIRE)--AM Best has downgraded the Financial Strength Rating to B (Fair) from B++ (Good) and the Long-Term Issuer Credit Rating to “bb+” from “bbb” of Brightsideco Insurance Limited (Brightsideco) (New Zealand). The outlook of these Credit Ratings (ratings) has been revised to stable from negative.
The ratings reflect Brightsideco’s balance sheet strength, which AM Best categorizes as adequate, as well as its marginal operating performance, limited business profile and appropriate enterprise risk management.
The rating downgrades follow a deterioration in AM Best’s view of Brightsideco’s operating performance and balance sheet strength fundamentals. The balance sheet strength assessment also factors a negative holding company impact arising from Brightsideco’s ultimate parent; ICF Holdings Pty Ltd (ICFH), whose creditworthiness, in AM Best’s view, has declined over recent years.
Brightsideco’s operating performance has exhibited heightened volatility and a deteriorating trend over recent years. The company’s combined ratio has fluctuated between 86% and 113% over the past five years (fiscal-years 2014-2018), with recent performance affected by a higher frequency and severity of claim costs arising from Brightsideco’s extended warranty products. In addition, a notable strengthening of the company’s unexpired risk reserve, which is captured outside the combined ratio of 113% for fiscal-year 2018, contributed to an overall operating loss of NZD 1.9 million for the year, equivalent to an operating ratio of nearly 150%. In response to the poor performance in fiscal-year 2018, the company has taken a number of remedial actions, including significant premium rate increases and amendments to policy terms and conditions, all aimed at improving prospective loss experience. While AM Best views these steps as positive, the nature of the company’s long-duration extended warranty products, means that these actions may take a number of years to have a full effect on earnings.
AM Best expects Brightsideco’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), to be categorized as strongest over the medium term, despite volatility experienced in recent years. In 2018, Brightsideco had a temporary breach of its regulatory solvency position in New Zealand, following the aforementioned reserve strengthening requirements. However, the shortfall in capital adequacy was replenished quickly via a capital injection of NZD 3.5 million from within the ICFH group. AM Best expects prospective regulatory solvency to be supported by improved internal capital generation over the medium term.
Other balance sheet considerations include the company’s very small absolute capital base, which increases its sensitivity to stressed scenarios. Furthermore, over the past few years, consolidated earnings and capital adequacy at ICFH have exhibited a declining trend. Any further deterioration in the financial strength of ICFH may exert pressure on the current ratings of Brightsideco.
AM Best views Brightsideco’s business profile as limited, reflecting the company’s small operational size, niche business portfolio and lack of geographical diversification. The company also is exposed to high concentration risk arising from its distribution channel, as almost all of its policies are distributed through Harvey Norman, a large retail electrical goods store in New Zealand. Brightsideco and the wider ICFH group’s relationship with Harvey Norman remains key to Brightsideco’s insurance operations.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
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