OREANDA-NEWS. Fitch Ratings has affirmed New Zealand-based Credit Union Insurance Limited (trading as Co-op Insurance NZ) at Insurer Financial Strength (IFS) rating of 'BBB-'. The Outlook is Stable.

KEY RATING DRIVERS

The rating takes into consideration Co-op Insurance NZ's consistently sound financial performance, and conservative investment mix. Constraining the rating is its small size and market position. While its capital level is commensurate with its business profile, the absolute amount of capital buffer in excess of regulatory minimum is limited.

Co-op Insurance NZ is a small player with a market share of less than 1% in the classes that it underwrites. That includes a range of simple and short-tail motor, consumer credit, death and funeral insurance products that are designed to meet the needs of its credit union owners' members. It taps into the large customer base of its credit union owners.

The company's regulatory capital ratio amounted to 110% at the end of the financial year to 30 June 2015 (FYE15) compared with 115.6% at end-December 2014. It has just NZD0.5m of capital in excess of the regulatory minimum of NZD5m at end-June 2015, which is low on an absolute basis and leaves the company vulnerable to unexpected operational risks, or changes in the external operating environment.

Co-op Insurance NZ's financial performance is consistently strong. Excluding the discretionary profit rebates paid to the credit unions, the company generated a ROAE and ROAA of 29.6% and 15.4%, respectively at FYE14. A conservative investment approach is reflected in a 100% allocation to on-call cash or short-term deposits. However, Co-op Insurance NZ has related-party exposure in the form of its on-call cash deposits with the New Zealand Association of Credit Unions (Long-Term Issuer Default Rating: BB+/Stable). The association trades as Co-op Money NZ.

RATING SENSITIVITIES

Triggers for a downgrade: The company could be downgraded should its regulatory capital ratio fall close to 105% without detailed plans by management to improve it, or if its financial performance deteriorate significantly. A breach of prudential solvency requirements with regulatory capital ratio below 100% would likely have serious implications and could result in the withdrawal of the company's license.

An unexpected weakening in the value of Co-op Insurance NZ's franchise - from a reduction in its importance to its stakeholders - could also result in a downgrade.

Triggers for an upgrade: Fitch considers this unlikely over the rating horizon given the company's small size and limited market position. Co-op Insurance NZ would need to significantly strengthen its franchise and market profile, while maintaining strong capital ratios with appropriate absolute capital buffer and healthy financial performance.