AM Best has reissued Sovereign's Financial Strength Rating at the A+ (Superior) level for the ninth consecutive year. It says the rating reflects Sovereign’s strong risk-adjusted capitalisation, good operating performance and favorable business profile.
It says that despite a high dividend payout ratio, the company’s risk-adjusted capitalisation is expected to remain supportive of the current ratings, underpinned by a relatively low premium growth rate, robust earnings derived from in-force business and stable investment returns. Sovereign’s operating performance is strong as demonstrated by a five-year average return on equity of approximately 13%.
Sovereign continues to be the largest life insurance company in New Zealand based on premium. In the 12 months to September 30 it captured market share of more than 25% of in-force risk premiums and more than 20% of new business premiums.
AM Best says Sovereign has competitive advantages in distribution, benefiting from a well-established adviser channel and an affiliated banking network through its sister company, ASB Bank.
The ratings agency says that compared to its peers (the top five life companies), Sovereign's advantage is a lower net benefit to net premium ratio, as well as lower commission and expense ratios.
"Sovereign retains a relatively sizable in-force book; thus claims experience is the main factor driving operating results. Over the past few years, net claim expenses amounted to roughly 50-55% of net premiums, which is slightly lower than the weighted average of its peers."
Sovereign's cost structure is also unique in two other areas.
One is that the company is in a "maturing stage of the life cycle" and with its multi-channel (adviser and bank) distribution model it operates on a "slightly lower commission expense ratio" than its peers.
The second is that its size gives it a more efficient cost structure.
As normal the ratings agency lists downside risks facing the company it is reporting on.
It says offsetting rating factors include New Zealand’s highly competitive life insurance market, particularly in the adviser channel. This has resulted in some pressure on Sovereign’s level of new business volume.
Nevertheless, AM Best also notes that Sovereign has a low appetite to grow or maintain its market share at the expense of lower expected profitability.
Sovereign is well-positioned at its current ratings level. "Downward ratings pressure could result if there is significant deterioration in its risk-adjusted capitalisation or operating performance. Additionally, the ratings could be downgraded if there is material deterioration in the consolidated financial condition of Sovereign’s ultimate parent."
Sovereign chief executive, Nick Stanhope, says the announcement is good news for advisers, customers and those in the market to purchase life and health insurance.
He says New Zealanders should care about this because the financial strength rating is an assessment of its ability to meet obligations to policyholders. "In the last year, Sovereign paid out more life insurance claims than any other New Zealand insurance provider," he says in a statement.
“We are really proud of our continued A+ rating and it just goes to show you can trust us," he says.
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