SINGAPORE--(BUSINESS WIRE)--AM Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” 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 categorises 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 that was at the strongest level as of fiscal year-end 2019, as measured by Best’s Capital Adequacy Ratio (BCAR). The company’s in-force life insurance portfolio is exposed to interest rate risk. However, despite having experienced movements in interest rates over the past few years, including during 2020 driven by the COVID-19 pandemic, FLNZ has maintained its capital adequacy, supported by appropriate asset-liability management. A partially offsetting balance sheet factor remains the company’s moderate-sized absolute capital base, which exposes capital adequacy to volatility in the event of stressed scenarios. The balance sheet assessment also factors in a neutral holding company assessment, following a review of Foundation Life (NZ) Holdings Limited (FLNZH), which owns 100% of FLNZ. While AM Best views FLNZH’s financial leverage as elevated with this debt historically serviced through the upstreaming of earnings from FLNZ, any inability from FLNZ to continue to provide sufficient support is not expected to result in pressure from the parent or the ultimate shareholders.
FLNZ has a track record of reporting adequate operating performance, with a five-year weighted average return-on-equity ratio of 11.3% (fiscal years 2015-2019). The company’s expense ratio has trended upward during the past two years, as a result of increasing costs associated with Project Scholar (a process aimed at developing a scheme of arrangement proposal for policyholders) and reducing economies of scale, as the company’s run-off business continues to diminish in size. Prospectively, AM Best expects FLNZ to report positive earnings over the near to medium term, despite potential expense burden arising from future project costs and exposure to economic factors such as severe movements in interest rates, which may drive volatility.
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 a process to restructure its remaining insurance portfolio by undertaking a scheme of arrangement proposal for its policyholders, known as 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 the impact of the COVID-19 pandemic more recently. As of August 2020, 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.
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