by Jenha White
The rating reflect Sovereign's supportive risk-based capitalisation, favourable operating performance and strong business profile.
AM Best says Sovereign's capital position reflects its profitable earnings, which have contributed to surplus growth over the past five-year period ending June 30, 2010, despite historical relatively high parental dividend payments.
"While the surplus level was impacted by a large dividend payment of $97 million versus a net income of $123 million in fiscal year 2010, the company continued to maintain a solid risk-adjusted capitalisation to support its existing policyholder liabilities and business growth."
The report says Sovereign's operating results have been contributed by favourable experience profits and strong investment earnings in most of the recent five fiscal years.
Net profit after tax in fiscal year 2010 was enhanced by 12% over the prior year due to improved persistency experience and a one-off large positive experience for tax as a result of a future reduction in the corporate tax rate in July 2011.
Sovereign has maintained stable return on equity and return on assets of 20.5% and 5.5%, respectively, for the current year.
A M Best says Sovereign sustains the market leader in the local industry, representing nearly 30% of the market with respect to both in force and new businesses.
"The company is expected to remain well positioned in the market through its well-established distribution platform and diversified insurance products over the near term. "
However, A M Best says partially offsetting these positive factors are potential lower new business profitability and uncertainty in the potential capital position in relation to new solvency standards for life insurers in New Zealand.
"The profitability of life new business has gradually decreased in recent years due largely to increases in initial commission rates.
"Going forward, Sovereign's new business profitability is expected to be weaker relative to fiscal year 2010 under the new life taxation regime in the country."
Additionally, A M Best says the highly competitive local life insurance market makes generating profitable growth in new sales is a challenge.
In light of proposed new capital standards by Reserve Bank of New Zealand, Sovereign may be pressured to infuse more capital relative to its liabilities prospectively.
Jenha is a TPL staff reporter. jenha@tarawera.co.nz
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