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 incorporates Co-op Insurance NZ's sound financial performance, and conservative investment mix. However, the company is a niche player in the local market with limited size and market position. Its capital level is commensurate with its business profile, but its small absolute capital base could leave the company more exposed to larger operational risks or unexpected changes in the external operating environment.

Co-op Insurance NZ has 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 ultimate owners, which are 13 New Zealand credit unions that together have around 185,000 members.

The company's regulatory capital ratio amounted to 110% at the end of the financial year to 30 June 2015 (FYE15) compared with 113% at end-June 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.

Co-op Insurance NZ's financial performance is sound. Excluding the discretionary profit rebates paid to the credit unions, the company generated a ROAE and ROAA of 24.1% and 11.9%, respectively at FYE15, which are commensurate with its current rating category. A conservative investment approach is reflected in a 100% allocation to on-call cash or short-term deposits. However, Co-op Insurance NZ has some 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. At end-June 2015, this amounted to 10% of total investments and 14% of total shareholders' funds.

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 deteriorates 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 the company'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. The company would need to significantly strengthen its franchise and market profile, while maintaining strong capital ratios with appropriate absolute capital buffer and healthy financial performance.