SINGAPORE–(BUSINESS WIRE)–AM Best has downgraded the Financial Strength Rating to B (Fair) from B++ (Good) and the Long-Term Issuer Credit Rating to “bb+” from “bbb” of Provident Insurance Corporation Limited (PICL) (New Zealand). Concurrently, AM Best has placed these Credit Ratings (ratings) under review with negative implications.
The ratings reflect PICL’s balance sheet strength, which AM Best categorizes as adequate, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.
The rating downgrades reflect a deterioration in AM Best’s view of PICL’s balance sheet strength fundamentals. The company’s risk-adjusted capitalization for the fiscal year-ended March 31, 2019, as measured by Best’s Capital Adequacy Ratio (BCAR), is expected to have significantly weakened as compared with AM Best’s prior expectations. While PICL has yet to finalize its latest financial statements, the company is expected to record a notable provision for a previous contingent tax liability, which is anticipated to drive an operating loss and a decline in shareholders’ equity for the year. In addition, high organic and inorganic underwriting growth during fiscal year 2019 has further exacerbated the pressures on risk-adjusted capitalization.
The aforementioned tax liability follows an unfavorable court ruling for PICL in May 2019 regarding the company’s historical interpretation and application of New Zealand’s Goods and Services Tax Act 1985 for two of its insurance products; credit contract indemnity and guaranteed asset protection. PICL, supported by independent third-party opinions, historically had viewed these products to be exempt from goods and services tax (GST). However, the recent judgement made by the High Court of New Zealand determined that these products were not eligible for a GST exemption. PICL has lodged a notice with the New Zealand court system to reserve its position to appeal the recent judgement.
Since February 2019, as part of management’s ongoing considerations in respect of future planned business growth, PICL has been working through a process aimed at raising additional paid-up capital over the near term. While AM Best expects these actions to support the bolstering of prospective capital adequacy, this remains subject to the timing, magnitude and investor appetite for the planned capital raising.
The under review with negative implications status reflects the uncertainty that remains around the finalization of PICL’s year-end 2019 financial position, as well as prospective expectations. In order to resolve the under review status, AM Best expects to conduct a full assessment on PICL’s medium-term balance sheet strength fundamentals, as well as undertake a further review of risk management capabilities and capital management in light of increasing operational scale and widening product offerings. AM Best will give consideration to any developments regarding PICL’s appeal of the recent court judgement and execution of its planned capital raising actions.
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 Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and AM Best press releases, please view Guide for Media – Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.
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