Best Affirms NZ’s Sovereign Ratings

A.M. Best Co. has affirmed the financial strength rating of “A” (Excellent) and the issuer credit rating of “a+” of New Zealand’s Sovereign Assurance Company Limited with a positive outlook.

“The ratings reflect Sovereign’s sustainable market leadership, consistent overall operating profitability and improved risk-adjusted capitalization,” said Best. “The ratings also recognize the company’s diversified distribution capabilities and increased focus on its bancassurance partnership.”

Best noted: “Sovereign has established itself as the market leader in New Zealand’s life insurance industry. The company has maintained its leadership position for the past five years, capturing approximately 32 percent of the market (as measured by in force premium) as at September 2006.

“Through its strategic alliance with the ASB Bank, a fellow subsidiary of Commonwealth Bank of Australia, and other distribution channels, Sovereign experienced strong growth in new business premium in recent years. A.M. Best believes its broad distribution network has given Sovereign a competitive advantage among its peers.

“Overall operating performance has been profitable. In addition to a stable persistency level and continued improvement in expense ratio, strong investment earnings have contributed to the company’s bottom line profits over the past years. Sovereign’s embedded value increased 16.4 percent to NZD 864 million (approximately $515 million) as at fiscal year-end June 2006.” Best indicated that expects “consistent premium growth and favorable investment earnings will further enhance the company’s embedded value.”

The rating agency also noted that, “despite its relatively high exposure to equities, Sovereign’s flexible insurance liability structure enables the company to absorb potential shocks resulting from adverse movement in the equity and property markets.

“Sovereign’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio, has improved in fiscal year 2006. An increase in retained earnings has contributed to the company’s improved capital position. Furthermore, the capital injection of NZD 60 million (approximately $36 million) to Sovereign from the parent company in December 2006 will support future business growth.

“Partially offsetting these positive factors are strong market competition and uncertainties in relation to life insurance taxation reform. These uncertainties would have a financial impact on life insurance companies in general.

“Strong business competition for term life and income protection policies from aggressive movers with niche distribution strategies could challenge Sovereign’s ability to sustain profitable growth in the mid-term.”