Gloomy picture painted of life industry

It says one of the fundamentals which underpins this outlook is the low level of personal savings in New Zealand, due to a lack of tax incentives and the absence of a system support to encourage investments and savings for retirement.

"Nevertheless, the industry, with some assistance from the life industry association and the government, will gradually emerge from this long and difficult operating environment, and remains supported largely by rated bank and offshore parents."

S&P says the life insurance companies are operating under very competitive conditions, including product offering, pricing, and distribution stemming from lack of significant new business and the inability to grow funds under management.

In-force annual premium income for traditional and risk insurance business declined 9% to $1.04 billion in the 12 months to June 30.

"Insurers’ focus on boosting earnings is largely through operational cost efficiency and maintaining existing business. More life insurers in New Zealand are now offering capital-intensive risk products as a result of the country’s unfavourable personal tax regime, despite their desire to shift the focus on capital efficiency and increasing shareholders return."

"Some participants, however, have well formulated distribution strategies matched to product characteristics, and continued to perform well and generate solid profits.

The companies most likely to be affected by a downward ratings pressure are ones that:

• Cannot achieve sufficient scale and profile in their chosen market
• Cannot achieve a supportive near-term operating performance
• Continue to drive capital from their balance sheets without a corresponding reduction in risk or financial flexibility enhancement
• As part of a larger group, cannot meet the parent group’s strategic or financial objectives.

"Despite the negative outlook, Standard & Poor’s expects the financial strength of New Zealand life companies to remain satisfactory."

Meanwhile it says the outlook for the non-life sector is positive and it will maintain credit quality strength.

"The outlook continues to be stable underpinned by strong financial strength of the domestic entities and their parents.

"This strength, in turn, is supported by a relatively strong earnings profile, solid capitalisation in the absence of any major catastrophe and large insured loss, and conservative investment strategy," Standard and Poors analyst Kate Thomson said.

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