(The following statement was released by the rating agency)
June 05 -
Summary analysis -- Westpac Life-NZ-Ltd. -------------------------- 05-Jun-2012
CREDIT RATING: Country: New Zealand
Local currency AA-/Stable/--
Primary SIC: Life insurance
Credit Rating History:
Local currency Foreign currency
01-Dec-2011 AA-/-- --/--
21-Feb-2007 AA/-- --/--
Our ratings on Westpac Life-NZ-Ltd. (Westpac Life NZ; AA-/Stable/--) reflect the insurer's strong stand-alone credit profile (SACP) and "core" status to ultimate parent Westpac Banking Corp. (Westpac; AA-/Stable/A-1+), as well as our expectation that, in the event of a crisis, extraordinary Australian government support is likely to be made available to it indirectly via the wider banking group. This expectation reflects our view that the parent bank, whose rating benefits from government support, would be in a position to extend that support to its core subsidiaries.
The core status of Westpac Life NZ reflects our opinion of its high degree of strategic, operational, and financial integration with Westpac, via the banking operations of Westpac New Zealand Ltd. (AA-/Stable/A-1+) and the insurance and wealth management operations of the BT Financial Group division of the bank. In our assessment of the core status, we acknowledge Westpac Life NZ's 100% ownership by Westpac, shared Westpac brand name, and aligned distribution. Although Westpac Life NZ is a relatively small subsidiary in the group, it operates in areas that are integral to the overall group bancassurance strategy, and widens the cross selling of financial services products to bank customers.
Westpac Life NZ's strong SACP reflects its conservative financial structure, including strong risk-based capital metrics, as well as strong and consistent earnings profile. These strengths are partially offset by Westpac Life NZ's modest competitive position within the wider market, given it only sells to Westpac group customers.
Westpac Life NZ's operating performance is strong due to the cost efficiency and risk-selection opportunity of being able to access the bank's branch network and customer base. Westpac Life NZ's earnings before interest and tax (EBIT) totaled NZ$42.2 million for the year ended Sept. 30, 2011, up 9.8% from a year earlier, and representing a strong return on equity and revenue. Results have been broadly in line with the company plan, with redundancy claims slightly higher under the difficult economic and market conditions of 2011 and into 2012. Despite some economic hardship in the market, lapse rates remained stable through the year and revenue growth was good. Investment earnings were sound, in the context of a declining-interest-rate environment.
Westpac Life's capitalization is strong on a risk-based approach, and has grown to NZ$152.9 million as of the balance date, with no dividend paid since 2010. While the level of paid-up capital is modest against major peers, we have assessed it as being strong relative to risk and believe it represents a strong multiple over the new solvency standards of the Reserve Bank of New Zealand.
The stable outlook on Westpac Life NZ reflects our outlook on Westpac, as well as our view that Westpac Life NZ will maintain its sound business position, strong capitalization, and conservative financial risk appetite.
The stable outlook on Westpac reflects our view that the ratings are likely to remain unchanged during the next one to two years. To maintain the stable outlook, we expect that Westpac's risk-adjusted capital (RAC) ratios will remain consistent with our view that they are "adequate," the bank's risk position will not deteriorate materially or unexpectedly, and funding and liquidity will be well managed.
In the unlikely occurrence of a significant stress event, we expect that Westpac Life NZ would likely receive indirect extraordinary government support via the wider banking group. Any factor causing our view on this support to change could affect the rating. A downward rating movement on Westpac Life NZ could occur if Westpac were downgraded, or if Westpac Life NZ's business and/or financial profile deteriorated to the extent that it affected our view of Westpac's commitment, and our assessment of Westpac Life NZ's core status. A higher rating on Westpac Life NZ would be possible if Westpac were upgraded, but an improvement in Westpac Life NZ's SACP would be unlikely to affect its ratings.