AM Best has given Sovereign afinancial strength rating of A+ (Superior) and issuer credit rating of “aa-” and the outlook for both ratings is stable.
The affirmation of the ratings reflects Sovereign’s supportive risk-based capitalisation, profitable operating performance and its leadership in the New Zealand life insurance market.
Continued profitability and higher earnings retention helped the company to increase its capital position in the year to June 30, 2011. While fiscal year 2011 after-tax profits were lower than in the prior year, higher earnings retention helped Sovereign to increase its capital position by 8.4% to $668 million. The company’s risk-adjusted capitalisation remains stable compared to the prior year and supportive of its current ratings.
Sovereign remains the market leader in the New Zealand life insurance market and has maintained a market share of around 29% to 30% of in-force premiums over the past five years. Like many of its peers, advisers are the company’s main distribution channel. Sovereign’s distribution benefits from its affiliation with ASB Bank.
Partially offsetting these positive factors are challenges in new business generation, lower new business profitability and uncertainty in its potential capital position in relation to new solvency standards for life insurers in New Zealand.\
Competitive pressure on premium rates and the difficulty in passing on higher regulation costs have impacted the company’s new business profitability. Adviser sales capacity has been negatively impacted by an increased demand for regulatory training, and consequently, the company’s share of new business premiums declined in the year to June 2011. Lower new business growth is weighing on the company’s profitability, as fixed costs are spread over a smaller new premiums base.
Like its peers, Sovereign faces a catastrophe risk charge for extreme events, such as a pandemic, under the Reserve Bank of New Zealand’s new solvency standards. This will increase the company’s capital requirements and could pressure its risk-adjusted capitalization. Management indicated that dividend policy flexibility and potential group support could help to mitigate the impact on the company’s risk-adjusted capitalization.
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