AM Best Affirms Credit Ratings of Foundation Life (NZ) Limited

AUGUST 22, 2024 09:23 AM (EDT)

AM Best Affirms Credit Ratings of Foundation Life (NZ) Limited

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FOR IMMEDIATE RELEASE

SINGAPORE - AUGUST 22, 2024 09:23 AM (EDT)
AM Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of "a-" (Excellent) of Foundation Life (NZ) Limited (FLNZ) (New Zealand). The outlook of these Credit Ratings (ratings) is stable.

The ratings reflect FLNZ's balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.

FLNZ's balance sheet strength assessment is underpinned by its risk-adjusted capitalisation, as measured by Best's Capital Adequacy Ratio (BCAR), which remains at the strongest level. FLNZ is a run-off insurer that holds a sizable buffer above its minimum regulatory capital requirement. The company has prudent capital management, including appropriate asset-liability management on its in-force life insurance portfolio, which helps to mitigate the impact of fluctuating interest rates. A partial offsetting balance sheet strength factor is the company's moderate-size absolute capital base, which exposes its capital adequacy to potential volatility in the event of stress scenarios. FLNZ's balance sheet strength assessment also factors in a neutral holding company assessment, following a review of Foundation Life (NZ) Holdings Limited (FLNZH), which owns 100% of FLNZ. AM Best views FLNZH's financial leverage as elevated, with debt historically serviced by FLNZ's earnings. However, there is strong alignment of interest between the group's ultimate equity and debt holders, and interest payments on the debt have been deferred in order to support capital adequacy at FLNZ in recent years.

FLNZ's operating performance is assessed as adequate, with operating earning exhibiting an improving trend over the last two years. The company recorded an elevated expense ratio over the last five years, due to costs associated with Project Scholar (a process aimed at restructuring FLNZ's remaining insurance portfolio by undertaking a scheme of arrangement proposal for its policyholders) and reducing economies of scale as the company's run-off business decreases in size. AM Best expects FLNZ's operating performance metrics to remain at an adequate level over the near to medium term. However, potential expense burdens arising from future project costs may lead to weaker profitability.

AM Best views FLNZ's business profile as limited given its position as a run-off life insurer and its moderate scale of operations in New Zealand. Since 2018, the company has engaged in executing Project Scholar. This would result in existing FLNZ policyholders being offered a cash buyout option, replacement cover with another New Zealand life insurer or a combination of both. Execution of Project Scholar has taken longer than expected, partially due to prevailing market conditions including movements in interest rates, and disruption caused by the COVID-19 pandemic. As of August 2024, the proposed scheme remains subject to regulatory, legal and policyholder approvals. If successfully implemented, AM Best expects FLNZ to cease insurance activities.

Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.

This press release relates to Credit Ratings that have been published on AM Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best's Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best's Credit Ratings. For information on the proper use of Best's Credit Ratings, Best's Performance Assessments, Best's Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best's Ratings & Assessments.

AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.