OREANDA-NEWS. Fitch Ratings has affirmed Suncorp Group Limited's (SGL) Long- and Short-Term Issuer Default Ratings (IDR) at 'A+' and 'F1' respectively. At the same time, Fitch has affirmed SGL's main non-life insurance operating subsidiary AAI Limited's (AAI) IDR at 'A+', Insurer Financial Strength (IFS) rating at 'AA-' and subordinated debt at 'A'. The Outlooks are Stable.

KEY RATING DRIVERS
The affirmations reflect SGL's and AAI's strong brands and franchise, solid operating performances, comprehensive reinsurance programme, robust capital ratios, moderate financial leverage, conservative investment approach and historically sound non-life reserving.

Offsetting these strengths to some extent is SGL's subsidiary Suncorp-Metway Limited's (SML, A+/Stable) large banking exposure and weaker standalone profile (viability rating: 'a-'). However, SML's improved risk profile and operating performances are credit positive.

SGL is Australia's largest non-life insurer and sixth largest life insurer by premium volume, and sixth largest bank by residential assets. It is New Zealand's second largest non-life insurer by premium volume. The group has maintained strong competitive positions in core markets, despite increased competition and new participants.

SGL's simplification and optimisations programs have supported stronger group performance over 18 months to the financial half-year ended-2015 (1H16) compared to the previous three years. Earnings were below group expectations, in 1H16 mainly due to claims inflation and higher natural hazard losses in the non-life division. However, the life division continued to experience positive claims and lapse experience and the bank's contribution to earnings continued to improve.

Fitch considers insurance risk to be well-mitigated through solid reinsurance arrangements. SGL's property catastrophe programme for FY16 provides cover of up to AUD6.9bn against an extreme loss event and the net retention of AUD250m at end-1H16 was a relatively modest 3% of the non-life division's net assets.

Capital ratios declined, but surplus capital remains above high internal regulatory targets. The group held AUD1.3bn (ex-dividend) of capital at end-1H16, above internal targets, and AUD506m above common equity Tier 1 targets. Fitch considers capital to be fungible and assesses capital adequacy at a group level. Assessed through the agency's proprietary Prism Factor Based Capital Model, capitalisation is assessed as 'extremely strong'.

The insurance divisions' investment portfolios are conservatively positioned, with 95% of investments held in cash or highly-rated fixed-income securities at end-1H16. The non-life division's investments made up 89% of total investments and 64% of the division's fixed-income investments were rated 'AA-' or higher. Equity exposure is low and, as a result, the 'risky' asset-to-equity ratio of 5% at end-1H16 for the insurance divisions is very low relative to Fitch's median criteria guidelines.

Reserving across the non-life division is strong and has historically produced large claim reserve redundancies. A conservative reserving bias, improvements in claims management and the maintenance of strong risk margins have supported positive prior-period reserve development, which averaged 4% a year of the non-life division's opening equity in the five years to FYE15.

RATING SENSITIVITIES
SGL's IDR is likely to move in line with AAI's IDR and IFS rating.

Positive rating action is unlikely, as the group's banking exposure is large relative to the size of the insurance entities and SML's standalone profile acts as a drag on the group rating. Positive rating action would require a stronger standalone profile for SML, an extended period of robust operating performance across all businesses and, at a group level, strong and sustained capital ratios.

Key rating triggers that could lead to a downgrade include a severe deterioration in the non-life operations' long-term results, particularly if the deterioration coincides with weaker banking or life operations performance, damages franchise value or leads to lower capital ratios. Profitability in the non-life operations remains key to the group's ratings. Ratings could be downgraded should earnings be consistently below industry levels and, specifically given the group's high ratings, should combined ratios exceed 100% and insurance trading ratios fall below 10% over an extended period.