AM Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” (Excellent) of Police Health Plan Limited (PHP) (New Zealand).

The Credit Ratings (ratings) reflect PHP’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management. In addition, the ratings factor in a neutral impact from the company’s ultimate ownership by the New Zealand Police Association (NZPA).

The revision of the outlooks to negative from stable reflects increasing pressure on PHP’s operating performance, which also places pressure on its balance sheet strength fundamentals, given the declining risk-adjusted capitalisation due to underwriting losses and PHP’s limited financial flexibility.

PHP’s balance sheet strength assessment is underpinned by its risk-adjusted capitalisation that remains at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR), albeit exhibiting a decreasing trend. This reflects the company’s moderate underwriting leverage and conservative investment approach. As a public-benefit insurer dedicated only to its captive membership base, AM Best views PHP’s financial flexibility as limited. An offsetting balance sheet factor is the company’s modest capital base, which results in higher sensitivity of capital adequacy to stress scenarios or fluctuations in performance.

AM Best assesses PHP’s operating performance as adequate, with a five-year average return-on-equity ratio of 3.5% (fiscal years 2019-2023), albeit exhibiting a decreasing trend over the period. PHP benefits from an efficient cost structure that allows it to offer competitive health coverage and premium rates to its members. As a not-for-profit insurer, given that the company’s regulatory solvency ratio is higher than its internal target and it does not pay dividends, PHP is in the process of returning part of its capital to policyholders by maintaining an elevated loss ratio over the medium term. Nonetheless, the increase in loss ratio in recent fiscal years was higher than PHP’s previous business plan. PHP has increased the premium rate significantly to improve its underwriting profitability. Prospectively, AM Best expects PHP to maintain long-term performance close to break-even despite weaker underwriting results. However, if its claims experience is significantly above plan, AM Best expects PHP to adjust premium rates rapidly, as it has done historically.

PHP provides health insurance exclusively to current and former members of the New Zealand police and their families. Despite having a relatively small premium base in New Zealand’s health insurance market, the company’s business profile assessment factors in its high penetration rate within the police force and its close integration with the NZPA, which gives rise to synergy and efficiency benefits. PHP has preferential access to the NZPA’s member base, benefits from low distribution costs, and shares overhead with the broader group.

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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