AM Best Affirms Credit Ratings of Quest Insurance Group Limited

SINGAPORE–(BUSINESS WIRE)–AM Best has affirmed the Financial Strength Rating of B (Fair) and the Long-Term Issuer Credit Rating of “bb+” (Fair) of Quest Insurance Group Limited (Quest) (New Zealand). The outlook of these Credit Ratings (ratings) is stable.

The ratings reflect Quest’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 impact from the company’s ultimate majority ownership by Federal Pacific Group Limited.

Quest’s balance sheet strength assessment is underpinned by its risk-adjusted capitalisation, which was at the strongest level as at fiscal year 2022, as measured by Best’s Capital Adequacy Ratio (BCAR). The company’s underwriting risk has increased significantly in recent years due to strong portfolio growth. However, this was partially offset by its improved asset quality following the sale of an underlying asset in an illiquid private equity investment in fiscal year 2021. The current asset allocation of cash, term deposits and affiliated loans is expected to remain largely unchanged over the medium term. Offsetting balance sheet strength factors include the company’s small absolute capital base, which increases the sensitivity of risk-adjusted capitalisation to stress scenarios and changes in future performance, business growth and dividend payouts.

AM Best assesses Quest’s operating performance as adequate and notes its moderate level of volatility. The company has a five-year average return-on-equity ratio of 18.8% (fiscal years 2018 to 2022) and the overall earnings during this period reflect a combination of robust underwriting performance and positive investment returns. The company’s underwriting performance has improved over the past two years largely due to a lower expense ratio despite a deterioration in its loss ratio. The improved expense ratio was mainly driven by economies of scale, as well as a lower commission rate due to changes in product mix and the earnings pattern of premium for long duration products as those policies mature. However, recent rapid business growth in the company’s less profitable comprehensive vehicle insurance (CVI) has resulted in an increased loss ratio; this is expected to continue to drive potential volatility in its operating performance over the medium term.

Quest’s business profile assessment of limited reflects its small market presence and relatively concentrated niche product offering, largely as a provider of CVI and mechanical breakdown insurance (MBI) in New Zealand. The company’s scale of operation has increased significantly in recent years, driven by both the growth in Quest’s direct channels and a strategic partnership with Janssen Insurance Limited (Janssen), a third-party distributor of motor-related insurance. This has diversified Quest’s distribution channels outside of affiliated business written in conjunction with its intermediate parent group, Geneva Finance Limited. However, there is a level of concentration risk associated with the company’s distribution agreements with Janssen. Prospectively, AM Best expects Quest’s business growth over the medium term to be driven largely by increased volumes written through the partnership with Janssen, as well as from direct distribution of MBI and CVI business.

AM Best assesses Quest’s ERM as appropriate given the current size and complexity of the company’s operations. Following recent business expansion, the company is exposed to an elevated level of underwriting and execution risk. However, this risk has been mitigated partially to date through adequate monitoring of underwriting performance, and a conservative approach to pricing and reserving supported by a third-party actuary. AM Best considers Quest’s risk management capabilities as appropriate for its key risks, and expects continual development as the company increases its scope of operations over the near term.

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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