Overview
- Challenger Life Co. Ltd. (CLC) has a strong market position in Australia's annuities and retirement product market, and a robust capital position.
- However, the company has slightly higher asset risk exposure than that of peers and required some de-risking amid financial market volatility triggered by COVID-19.
- We are revising our outlooks on CLC and its holding company Challenger Ltd. to stable from positive. At the same time, we affirmed our 'A' long-term insurer financial strength and issuer credit ratings on CLC, and our 'BBB+' long-term issuer credit rating on Challenger Ltd. We also affirmed our 'BBB' issue rating on CLC's subordinated debt issue.
- The stable outlooks on CLC and Challenger Ltd. reflect our view that the disruption from COVID-19 will likely soften the pace of new sales and lower earnings margins in the next 12-18 months.
Rating Action
On March 27, 2020, S&P Global Ratings revised the outlooks on Challenger Life Co. Ltd. (CLC) and its holding company Challenger Ltd. to stable from positive. At the same time, we affirmed the 'A' long-term insurer financial strength and issuer credit ratings on CLC, and the 'BBB+' long-term issuer credit rating on Challenger Ltd. We also affirmed the 'BBB' long-term issue rating on CLC's subordinated debt issue (with intermediate equity content).
Outlook
The stable outlook reflects our view that CLC and the broader group will maintain their very strong financial profile and strong business profile amid the COVID-19 market disruption. We see the recent actions to de-risk the investment asset portfolio and boost liquidity as bolstering regulatory capital metrics. Our previously more optimistic medium-term view is now clouded by the current disruption in financial advice distribution, investment-market volatility, and a likely slowdown in new product sales.
However, we still expect CLC to benefit in the next two to three years from reforms in the financial retirement product space in Australia--making annuity products more attractive--and from increasing product sales in Japan associated with ongoing strategic engagement with its 16% shareholder MS&AD Insurance Group Holdings Inc. (core operating entities rated A+/Stable).
Upside scenario
Upside ratings potential could arise if the insurer strengthens its business profile over the next one to two years, and earnings and margins normalize after the COVID-19 outbreak is contained. This could be by enhancing its diversity and quality of earnings, including from Japan, and gaining good traction from reforms and product demand in Australia's annuities market.
Downside scenario
Downside ratings potential could arise within the next 12 months if CLC faces heightened business or financial pressures associated with the COVID-19 pandemic, including product demand weakness, advice channel difficulty, further material declines in investment asset value, or ongoing margin pressures.
Rationale
We affirmed the ratings on CLC, Challenger Ltd., and on CLC's debt issue amid the COVID-19 market disruption because the group's robust capital position is actively protected via a de-risking of its investment asset portfolio. We expect margin pressure in the next 12-18 months and the realization of investment losses to weigh on reported earnings. However, we consider the group's capital position and liquidity to be robust and see opportunity for improved returns and annuities demand in the next two to three years.
The ratings on CLC reflect the insurer's strong but concentrated business position in Australia's annuities market, and its robust capital. CLC represents the bulk of the group's earnings and equity, and its 'a' stand-alone credit characteristics drive the 'a' group credit profile of the Challenger group. This is the benchmark from which we derive our ratings on the operating company, the holding company, and debt and hybrid issues.
We view CLC's leading position in annuities as a key strength. However, it subjects the insurer to ongoing government and regulatory reforms in the retirement product segment. The ongoing disruption in the financial advice space and an increase in investment-market volatility post the Hayne royal commission and amid the COVID-19 outbreak have moderated CLC's new business flows and earnings. However, we see good potential for CLC to return to solid growth over the next two to three years.
We see an opportunity for CLC to boost its business diversity from its expanded Japan business under its strategic relationship with shareholder MS&AD Insurance Group, and the group's existing fund management business.
Our view of CLC's moderately high risk exposure takes into account the insurer's slightly higher asset risk appetite than that of its peers, particularly in its allocation to property and alternative assets. CLC reduced its exposure to property and purchased some equity market collar protection in 2019. Under recent market pressure, it actively reduced its exposure to equities, infrastructure, and sub-investment rated bonds to keep its regulatory capital within its target range.
Ratings Score Snapshot
| Business Risk Profile | Strong | |||||
|---|---|---|---|---|---|---|
| Competitive position | Strong | |||||
| IICRA | Low risk | |||||
| Financial Risk Profile | Very Strong | |||||
| Capital and earnings | Excellent | |||||
| Risk exposure | Moderately high | |||||
| Funding structure | Neutral | |||||
| Anchor* | a | |||||
| Modifiers | ||||||
| Governance | Neutral | |||||
| Liquidity | Exceptional | |||||
| Comparable ratings analysis | 0 | |||||
| Financial Strength Rating | A | |||||
| *This is influenced by our view of CLC's current business and earnings concentration. | ||||||
Related Criteria
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Insurance | General: Insurers Rating Methodology, July 1, 2019
- Criteria | Insurance | General: Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010
- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
Ratings List
| * * * * * * * * * * * * * * * Challenger Ltd. * * * * * * * * * * * * * * | ||
| Ratings Affirmed | ||
|---|---|---|
|
Challenger Life Co. Ltd. |
||
| Subordinated | BBB | |
| Ratings Affirmed; CreditWatch/Outlook Action | ||
| To | From | |
|
Challenger Life Co. Ltd. |
||
| Issuer Credit Rating | ||
| Local Currency | A/Stable/-- | A/Positive/-- |
| Financial Strength Rating | ||
| Local Currency | A/Stable/-- | A/Positive/-- |
|
Challenger Ltd. |
||
| Issuer Credit Rating | BBB+/Stable/-- | BBB+/Positive/-- |
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
| Primary Credit Analyst: | Michael J Vine, Melbourne (61) 3-9631-2013; Michael.Vine@spglobal.com |
| Secondary Contact: | Craig A Bennett, Melbourne (61) 3-9631-2197; craig.bennett@spglobal.com |
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