SINGAPORE: AM Best has affirmed the Financial Strength Rating of B (Fair) and the Long-Term Issuer Credit Rating of “bb+” of Brightsideco Insurance Limited (New Zealand). The outlook of these Credit Ratings is stable.
The ratings reflect Brightsideco’s balance sheet strength, which AM Best categorises as adequate, as well as its marginal operating performance, limited business profile and appropriate enterprise risk management.
Brightsideco’s balance sheet strength is underpinned by its risk-adjusted capitalisation, which AM Best expects to remain at the strongest level over the medium term, as measured by Best’s Capital Adequacy Ratio (BCAR).
Following a notable strengthening of the company’s unexpired risk reserve (URR) that led to volatility in the regulatory solvency ratio in fiscal-year 2018, the company has taken a number of remedial actions, including significant premium rate increases and amendments to policy terms and conditions. As a result of these actions, the NZD 2.5 million URR at fiscal-year end 2018 has been almost fully released as at March 2020.
AM Best expects prospective regulatory solvency to be supported by improved internal capital generation over the medium term. Other balance sheet considerations include the company’s very small absolute capital base, which increases its sensitivity to stressed scenarios. Furthermore, the balance sheet strength assessment factors a negative holding company impact arising from Brightsideco’s ultimate parent, ICF Holdings Pty Ltd (ICFH), following an assessment of consolidated risk-adjusted capitalisation.
Brightsideco’s operating performance has been characterised by heightened volatility and weakened key return metrics over recent years. The company’s recent underwriting results have been affected by a higher frequency and severity of claim costs arising from Brightsideco’s extended warranty products, with the company’s loss ratio increasing to 125.1% in fiscal-year 2019 from 73.0% in fiscal-year 2015. Favourable development of the URR in the period since fiscal-year 2018 has contributed to offsetting the elevated loss ratio in fiscal-year 2019 and returning the company to operating profitability following losses recorded in fiscal-year 2018.
Following the implementation of the aforementioned remedial actions, the company’s underwriting performance has demonstrated improvement in fiscal-year 2020 to date, and AM Best expects it to stabilise and continue to strengthen prospectively. However, AM Best notes that the nature of the company’s long-duration extended warranty products means that these actions may take a number of years to have a full effect on earnings.
AM Best views Brightsideco’s business profile as limited, reflecting the company’s small operational size, niche business portfolio and lack of geographical diversification. The company also is exposed to high concentration risk arising from its distribution channel, as almost all of its policies are distributed through Harvey Norman, a large electrical goods retailer in New Zealand.