AM Best has assigned a Financial Strength Rating of B+ (Good) and a Long-Term Issuer Credit Rating of “bbb-” (Good) to PPS Mutual Limited (PPS Mutual) (New Zealand). The outlook assigned to these Credit Ratings (ratings) is stable.

The ratings reflect PPS Mutual’s balance sheet strength, which AM Best assesses as adequate, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM). In addition, the ratings factor in a neutral holding company impact from PPS Mutual’s ownership by PPS Holdings Limited (PPS Holdings).

AM Best expects PPS Mutual’s risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), to be at the strongest level over the medium term. Despite the planned business expansion driving increased capital consumption during the company’s start-up phase, AM Best expects PPS Mutual to have appropriate capital management, supported by capital injections from PPS Holdings, as needed. PPS Mutual has a conservative investment strategy, with its investment portfolio consisting of cash and term deposits. In addition, AM Best views PPS Mutual to have a high reliance on third-party reinsurance for risk transfer and upfront commission financing. This risk is partially mitigated by the high credit quality of the reinsurance counterparty. Other offsetting balance sheet strength factors include PPS Mutual’s small absolute capital base over the medium term, which exposes its capital adequacy to potential volatility in the event of stress scenarios. PPS Mutual’s balance sheet strength assessment also factors in a neutral holding company assessment, following a review of PPS Holdings. Whilst PPS Holdings’ financial leverage is expected to be elevated, servicing of the long-dated loan at PPS Holdings is not expected to impact capital adequacy at PPS Mutual, given the ability to defer interest payments.

AM Best assesses PPS Mutual’s operating performance as adequate. During its start-up phase, AM Best expects the company to record operating losses in the first few years of operation, primarily driven by elevated expenses associated with information technology and system infrastructure. However, the company is expected to benefit from reinsurance commission income, which should help to offset outward acquisition costs during the initial growth phase. AM Best expects PPS Mutual to achieve a break-even position within the first five years of operation, as it grows in scale and executes its business plan.

AM Best views PPS Mutual’s business profile as limited, reflecting its small operational scale and start-up nature. The company is a member-owned insurer domiciled in New Zealand, distributing life insurance policies to a target segment of the professional market, through independent financial advisers. PPS Mutual is expected to adopt a fast-growing business strategy over the medium term, exposing the company to elevated execution risk. However, this risk is partially mitigated by the support from Professional Provident Society Insurance Company Limited, an affiliated South African insurer.

PPS Mutual’s ERM is assessed as appropriate given the size and complexity of the company’s operations. AM Best considers continual risk management developments necessary in order to support its increasing operational scale and evolving risk profile.

Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.

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