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, which remained at the strongest level as at fiscal year-end (30 September) 2022, as measured by Best’s Capital Adequacy Ratio (BCAR). FLNZ is a run-off insurer that holds a sizable buffer above its minimum regulatory capital requirement. The company benefits from prudent capital management, including appropriate asset-liability management on its in-force life insurance portfolio, which limits the impact of fluctuating interest rates. A partial offsetting balance sheet strength factor is the company’s moderate-size absolute capital base, which exposes its capital adequacy to potential volatility in the event of stress 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 debt historically serviced by FLNZ’s earnings. However, AM Best considers the risk of material capital extraction from FLNZ to service these debt obligations as being mitigated partially by 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 7.0% (fiscal years 2018-2022). The company recorded an elevated expense ratio over the past five 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 decreases in size. AM Best expects FLNZ’s operating performance metrics to remain at an adequate level over the near to medium term. However, potential expense burdens arising from future project costs may lead to weaker profitability.
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 result in existing FLNZ policyholders being 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 August 2023, 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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Michael Dunckley, CFA
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Senior Public Relations Specialist
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