AM Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of bbb of Consumer Insurance Services Limited (CISL) (New Zealand).
The negative Credit Rating (rating) outlooks reflect the companys diminishing business profile as a result of commencing to run off its insurance operations during 2019, as well as the increased potential for regulatory and operational risks arising from ongoing regulatory reviews surrounding the conduct and culture in New Zealands insurance market, in addition to product value creation.
The ratings reflect CISLs balance sheet strength, which AM Best categorizes as adequate, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM). The ratings also factor in a neutral impact from the companys ultimate majority ownership by FlexiGroup Limited.
CISLs balance sheet strength is underpinned by the companys risk-adjusted capitalization, as measured by Bests Capital Adequacy Ratio (BCAR), which is categorized as strongest. Despite the company entering into a run-off status during 2019, AM Best expects capital adequacy to remain at the strongest level over the medium term, supported by a gradual decline in underwriting risks and continued robust internal capital generation. A partially offsetting balance sheet factor is CISLs very small absolute capital base, which increases its sensitivity to stressed scenarios.
AM Best considers CISLs operating performance to be adequate. The company has reported a five-year average return on equity ratio of 30% (fiscal-years 2014 to 2018), albeit with moderate volatility in some years. The companys operating results over the past five years have been driven by favorable claims experience from its sole product offering of credit card repayment protection insurance. The companys five-year average combined ratio for fiscal-years 2014 to 2018 was 66%. Prospectively, AM Best expects underwriting performance to show a deteriorating trend, following the planned implementation of several product coverage enhancements for all existing policyholders. Despite these product adjustments, AM Best expects CISLs underwriting and operating performance to remain at an adequate level over the medium term.
AM Best views CISLs business profile as limited, reflecting its small scale of operations and niche position as a provider of credit card repayment protection for cardholder customers of its parent, FlexiGroup (New Zealand) Limited. The company ceased writing new business from November 2018 and renewal business from April 2019. AM Best expects CISLs existing policyholder obligations to run off over the course of approximately five years.
AM Best views the companys ERM framework to be appropriate given the current size and complexity of its operations. AM Best continues to monitor the impact of regulatory challenges in relation to product value creation, as well as conduct and culture in New Zealands insurance market. Any resulting increase in regulatory or operational risk for CISL likely will drive a mismatch between the companys risk management profile and capability.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
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