SINGAPORE--(BUSINESS WIRE)--AM Best has removed from under review with negative implications and affirmed the Financial Strength Rating of B (Fair) and the Long-Term Issuer Credit Rating of “bb+” of Provident Insurance Corporation Limited (PICL) (New Zealand). The outlook assigned to these Credit Ratings (ratings) is stable.
The ratings were placed under review with negative implications in July 2019, which reflected uncertainty around the finalization of PICL’s year-end March 2019 financial position, including the impact arising from recording a notable provision for a previous contingent tax liability, as well as prospective expectations concerning the company’s medium-term balance sheet fundamentals. These rating actions follow the conclusion of AM Best’s assessment of the company’s current and prospective financial position.
The ratings reflect PICL’s balance sheet strength, which AM Best categorizes as adequate, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM).
PICL’s balance sheet strength assessment reflects its risk-adjusted capitalization, which weakened notably as of fiscal year-end 2019, as measured by Best’s Capital Adequacy Ratio (BCAR). This followed an unfavorable court ruling in May 2019 regarding the company’s historical interpretation and application of New Zealand’s Goods and Services Tax Act 1985 for two of its insurance products; credit contract indemnity and guaranteed asset protection. As a result, the company recorded a notable provision for the tax liability impeding capital growth in the year, which when coupled with organic and inorganic underwriting growth weakened risk-adjusted capitalization. AM Best expects material strengthening of PICL’s risk-adjusted capitalization over the medium term to be constrained by ongoing underwriting growth. Other balance sheet factors include the company’s small absolute capital base, which exposes its risk-adjusted capitalization to volatility in stressed scenarios, and the company’s conservative investment strategy.
PICL’s operating performance has generally exhibited an improving trend since its inception in 2013, primarily driven by a favorable trend in the expense ratio due to growing economies of scale. PICL reported a weaker operating performance in fiscal-year 2019, which was adversely impacted by the aforementioned provision for goods and services tax liabilities. AM Best expects prospective performance to remain supportive of the adequate assessment over the near term underpinned by good loss experience on the company’s core mechanical breakdown insurance portfolio, although potential volatility could arise from the company’s growth plans and risk profile changes following the acquisition of the non-life portfolio of Credit Union Insurance Limited (trading as Co-op Insurance NZ [Co-op NZ]) in fiscal-year 2019.
AM Best views PICL’s business profile as limited given its relatively small scale of operations, and limited product and geographic diversification in New Zealand. The company is a niche insurer, with a focus on mechanical breakdown insurance, distributed through motor dealerships across New Zealand. PICL has diversified its underwriting profile recently through the acquisition of Co-op NZ’s portfolio.
AM Best assesses the company’s ERM as appropriate, given the size and complexity of its operations. However, in light of the company’s increased operational scale and widening product offerings, particularly in relation to the Co-op NZ acquisition, the scope and profile of PICL’s key risks have increased, and in response, AM Best expects the company’s risk management capability to strengthen in the near term.
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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