Strength of Kiwibank’s insurance business revealed

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AM Best’s rating on Kiwibank’s insurance business shows the strength of the risk bank’s business and distribution.

Thursday, September 20th 2012, 10:36PM

The ratings agency has given Kiwi Life Insurance a financial strength rating of A- (Excellent) and an issuer credit rating of “a-”. The outlook assigned to both ratings is stable.

The ratings reflect Kiwi Insurance’s status as a member of the New Zealand Post group of companies, its operating performance and balance sheet strength.

Access to NZ Post’s nationwide network and customer base helps to minimise Kiwi Insurance’s distribution costs. This strengthens Kiwi Insurance’s earnings quality due to its low amount of capitalised acquisition costs. Cost efficiencies from using shared group resources also contribute to Kiwi Insurance’s low cost structure.

Kiwi Insurance has shown a profitable operating performance in the past five years. Return on equity averaged 25%, despite full earnings retention and a substantial capital injection in 2011.

Kiwi Insurance’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), is strong. Capital requirements to support Kiwi Insurance’s underwriting risks are well supported by its capital, and any drag from capitalised acquisition costs is minimal. Going forward, due to higher risk retention and low earnings retention, Kiwi Insurance’s BCAR is expected to stabilise at a lower level that is in line with its assigned ratings.

Partially offsetting these positive rating factors is the relatively short history of Kiwi Insurance’s book of business, potential operational risks and vulnerability to adverse developments at the NZ Post group.

“While Kiwi Insurance’s experience profits have been good so far, underwriting statistics such as claims ratios will likely develop as the book ages. At what level the ratios stabilise remains to be seen.”

In the past, Kiwi Insurance outsourced its policy administration and the underwriting of some products to a considerable degree. However, Kiwi Insurance is now bringing these functions in-house as it intends to increase its risk retention and gain more control over client relationships and product design.

“At present, it is unclear how well Kiwi Insurance’s new staff and technology resources will cope with its new operational environment.”

Kiwi Insurance is vulnerable to any adverse developments at NZ Post and its sister company, Kiwibank. Cost rationalisation and capital constraints for example could negatively impact Kiwi Insurance’s operations and new business generation through a reduction in shared resources and lower than budgeted investments for NZ Post’s retail transformation.

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