Challenger Life Co. Ltd. Outlook Revised To Ratings Affirmed At #A#

Stocks and Financial Services Press Releases Monday November 13, 2017 17:38
MELBOURNE--13 Nov--S&P Global Ratings

MELBOURNE (S&P Global Ratings) Nov. 13, 2017--S&P Global Ratings today said it has revised its outlook to positive from stable on life insurance group Challenger Ltd. and its core operating entity Challenger Life Co. Ltd. (CLC). At the same time, we affirmed our 'A' financial strength and issuer credit ratings on CLC and our 'BBB+' issuer credit ratings on the group's holding company, Challenger Ltd.

The positive outlook on the group reflects our expectations in the medium term regarding CLC's strengthening business profile as it expands its leading market position in the Australian annuities market. We expect CLC's expansion of its distribution network, including the Japan-based MS&AD Group joint venture and access to material domestic platforms, to lessen the constraints of its limited product diversification. In our view, there is a one-in-three chance we will raise the long-term ratings on the group by one notch to 'A+' within the next two years. We expect the group, through its materially expanded distribution networks, to build strong earnings resilience without engaging in excessive risk taking, in particular around its investment portfolio and product pricing and reserving. We anticipate that CLC will maintain its very strong market position, focused on the provision of a range of annuities, and acknowledge the significant concentration in that product type. The positive outlook incorporates our expectation that the insurer will maintain its extremely strong capital adequacy, as measured by our insurance capital model, throughout the next two years and that the company will continue to improve its risk management controls. We assume the group will maintain its strong financial flexibility and fixed charge coverage above 8.0x.

We have retained our group credit profile (GCP) assessment at 'a', the lower of the two possible outcomes that could result from the group's strong business risk profile and very strong financial risk profile. This takes into account the reliance on annuities as a product and low level of product diversification as well as the higher risk profile of its investment portfolio compared with other Australian life insurers. Underpinning the current 'A' ratings, which we derive from the GCP, is the company's leading market position across Australia in annuities, its demonstrated capability to appropriately manage associated risks, and its extremely strong level of capital adequacy. The ratings also capture CLC's solid historic operating performance, which we expect to continue over the next few years. We also have a favorable view of the insurer's standards for operational performance.

The outlook is positive. We could raise the rating on CLC if the insurer exhibited continued strengthening of its business profile over the next two years. This could be evidenced by:
  • A strengthening of the quality and resilience of CLC's underlying earnings, for example growth in underlying net profit after tax of around 10% a year;
  • Improved earnings diversification benefiting from CLC's enhanced distribution networks and partnerships in Australia and Japan;
  • Maintenance of its dominant market position as Australia's leading annuities provider. This could be indicated by CLC continuing to write more than 90% of new business flows in Australia; and
  • Extremely strong capital adequacy, as measured by our capital model.
We could revise the outlook to stable over the next two years if CLC was to experience: