OREANDA-NEWS. Fitch Ratings has affirmed New Zealand-based Credit Union Insurance Limited (trading as Co-op Insurance NZ) at Insurer Financial Strength (IFS) rating of 'BB+'. The Outlook is Stable.

KEY RATING DRIVERS

Co-op Insurance NZ's rating reflects a sound business profile, adequate capital position, strong financial performance, conservative investment and liquidity positions and net retentions that are well managed through a solid reinsurance treaty. Constraining the rating is its small size and market position and limited financial flexibility.

The company offers simple, short-tail insurance products tailored to the needs of its credit union members. It benefits from the strong financial institution distribution channel of its credit union owners, and access to a large member base of around 185,000. The level of sales of life and consumer credit products into its member base has been very strong, and given the low relative level of member motor policyholders, future growth is likely to come through the motor portfolio. Co-op Insurance NZ's market share is modest at less than 1% in the classes that it underwrites.

Co-op Insurance NZ's capital adequacy is very strong based on a purely technical risk-based calculation with current risk exposures modest relative to minimum regulatory capital requirements. However, the company's regulatory capital base of NZD5.7m at the end of the financial year to 30 June 2014 (FYE14) is low on an absolute basis and this leaves the company more exposed to larger operational risks, or changes in the external operating environment. Operational risks appear to be well managed, and Co-op Insurance NZ's high degree of integration with the New Zealand Association of Credit Unions (Long-Term Issuer Default Rating: BB+/Stable) is positive in mitigating these risks. The association trades as Co-op Money NZ.

The company's financial performance has been very strong following the remediation of the motor portfolio and the transfer of a profitable life and consumer credit business from Co-op Money NZ. Excluding the discretionary profit rebates paid to the credit unions, the company generated a ROAE and ROAA of 30% and 15%, respectively in FY14.

A conservative investment approach is reflected in a 100% allocation to on-call cash or short-term deposits. Co-op Insurance NZ does have a large related-party exposure in the form of its on-call cash deposits with Co-op Money NZ. However, Co-op Money NZ adopts a low-risk approach to investments as it uses these funds to manage member credit unions' liquidity, which helps mitigate this counterparty risk.

Reinsurance cover is purchased to protect the motor portfolio against large single losses or from an accumulation of losses, and limits Co-op Insurance NZ's maximum retention to NZD100,000. Fitch considers the level of protection held above this retention to be adequate given the size and geographic spread of the motor portfolio.

RATING SENSITIVITIES

Triggers for a downgrade: The company could be downgraded should it fail to maintain solid solvency margins above the regulatory requirement of NZD5m. A breach of prudential solvency requirements would likely have serious implications and could result in the withdrawal of the company's license.

An unexpected weakening in the value of Co-op Insurance NZ's franchise - from a reduction in its importance to its ultimate shareholders - would place negative pressure on the rating.

Triggers for an upgrade: Fitch considers this unlikely over the rating horizon given the company's small size and limited market position. Co-op Insurance NZ would need to significantly strengthen its franchise and standalone financial flexibility, while maintaining strong capital ratios and a conservative risk appetite.