Fitch Affirms New Zealand's Southsure at IFS 'BBB '/Stable
KEY RATING DRIVERS
The affirmation of Southsure's rating reflects the benefits it receives from being part of a larger financial institution - Southland Building Society (SBS, trading as 'SBS Bank'; Long-Term Issuer Default Rating: BBB/Stable), which Fitch believes would be willing to provide support if required. The relationship provides Southsure with access to strong distribution channels and a valuable customer base.
The rating also incorporates Southsure's consistently sound financial fundamentals, which include robust operating performance and a prudent approach to risk and investment management. Further, its capital level is commensurate with its business profile, although the absolute capital base is modest. At 31 March 2015, its regulatory solvency ratio amounted to 121% (30 September 2014: 122%).
The insurer achieved a 16% return on assets in the financial year ended March 2014 (FY14) and averaged 15% over the last five years. For the six months ended 30 September 2014, its ROAE and pre-tax ROA amounted to 32.8% and 19.8% on an annualised basis.
As a small insurer, external risks to the franchise and operational risks, no matter how remote, are larger and weigh more heavily in a rating decision. Southsure remains largely dependent on the group's customer base to sell its products, although the sale of third-party non-life insurance policies has strengthened and provides greater customer and earnings diversity.
RATING SENSITIVITIES
Triggers for an upgrade: The key upgrade trigger for Southsure would be an upgrade in SBS's rating.
Triggers for a downgrade: Southsure's rating could be downgraded should it unexpectedly fail to maintain solid solvency margins above its regulatory minimum requirement of NZD5m. Given its high rating, a strong buffer above minimum regulatory capital requirements is essential to protect against the impact of major regulatory changes, to comply with licensing requirements and maintain its on-going viability.
Southsure's rating would be downgraded should SBS be downgraded. For example the franchise may be negatively impacted in the unlikely event that Southsure became less important to the group and access to the group's distribution channels was restricted.
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