13.07.2015, 08:55
Fitch Affirms QBE LMI and Genworth at 'AA-' and 'A '; Outlooks Stable
OREANDA-NEWS. Fitch Ratings has affirmed the Insurer Financial Strength (IFS) Ratings of Australian-based QBE Lenders' Mortgage Insurance Limited (QBELMI) and the operating subsidiary of Genworth Mortgage Insurance Australia Ltd (GMA), Genworth Financial Mortgage Insurance Pty Ltd (GFMI), at 'AA-' and 'A+', respectively. The Outlooks are Stable.
KEY RATING DRIVERS (QBELMI and GMA)
The operating environment and macroeconomic conditions are important rating drivers and despite a period of below trend growth, the Australian economy is relatively sound. The unemployment rate was 6% in June 2015 and has hovered slightly above this level over the past 18 months. Household leverage is at historic highs and falling mortgage rates have supported rapid price appreciation in the major Sydney and Melbourne housing markets. However, a conservative underwriting approach increasingly focused on serviceability, has resulted in mortgage debt concentrated in higher income households, with better debt servicing ability.
Interest and competition in the lenders mortgage insurance (LMI) sector has increased in recent years, although regulatory requirements are significant and customer relationships have proven sticky. The major banks continue to use LMI to transfer risk despite little if any capital relief and the product is not as price sensitive as other types of insurance. The relationships between Australian lenders and the LMIs tend to change infrequently. Typically renewed on a multiyear basis once the infrastructure is in place, LMI involves little direct additional cost for the lender, given the policy premium is paid for by the borrower.
KEY RATING DRIVERS (QBELMI)
The company's 'AA-'/Stable rating reflects a robust standalone credit profile which includes strong capital ratios and a major position in the Australian LMI sector. Solid operating performances and no debt, support financial flexibility, and internally generated capital is able to support growth if required.
QBELMI is able to attain a higher standalone rating than the main subsidiaries of its ultimate parent, QBE Insurance Group Ltd (QBE; main subsidiaries' IFS 'A+'/Negative). This is due to the strength of the regulatory ring fencing around QBELMI and its limited financial reliance on the group as a whole.
QBELMI's coverage of its regulatory prescribed capital amount (PCA) increased to a strong 1.51x at end-2014 (end-2013: 1.34x). The ratio was supported by growth in retained profits in addition to a reduction in capital requirements. The company ceded a greater share of risks underwritten in 2014 through an expanded quota share reinsurance arrangement. A large reduction in claim reserve risk margins and a change in premium recognition supported profits in 2014, although reduced the level of surplus in the capital calculation. Despite a reduction in risk margins they are still significantly above the central estimate.
QBELMI's profitability in 2014 was positively impacted by reserve adjustments but nonetheless has been consistently strong. Its average pre-tax ROA and ROAE was 13% and 17%, respectively, in the five years to end-2014 while its average loss ratio over this period was a low 13%.
KEY RATING DRIVERS (GMA)
The company's 'A+'/Stable rating reflects a robust standalone credit profile, which includes strong capital ratios, a conservative investment approach and a leading market position in a niche insurance sector with high barriers to entry. A favourable operating environment has supported earnings and the company's financial flexibility was enhanced by improved capital market access following its partial IPO in 2014. Constraining the rating is the weak credit profile of the majority shareholder, Genworth Financial Inc (GNW).
GMA is able to achieve a higher rating than the US life operating subsidiaries (IFS Ratings 'BBB'/Negative) of GNW, as a result of the strength of the regulatory ring-fencing in Australia and substantial minority shareholder base (48%). Fitch considers GNW constrained from undertaking capital actions that would weaken the credit profile of GMA for regulatory and business reasons. In the agency's opinion GNW would be limited to a further or complete sell down in its stake in GMA if it wanted to repatriate a significant level of capital from the Australian operations.
GMA's coverage of its regulatory prescribed capital amount (PCA) was a strong 1.59x at end-2014. Fitch expects that GMA will continue to generate a significant level of capital through strong earnings, and the PCA is likely to fall overtime, should regulatory pressure to slow the growth of higher LVR (more capital intensive business) continue. Any increased risk in the investment portfolio will provide some offset to a decline in the PCA.
RATING SENSITIVITIES
Triggers for a downgrade (QBELMI and GMA): A severe deterioration in the operating environment as a result of rising unemployment and other macroeconomic factors remains the most serious threat to the ratings of QBELMI and GMA. However, Fitch continues to see this as unlikely and is forecasting a relatively solid economic performance in coming years.
Coverage of QBELMI's or GMA's PCA falling below 1.3x for a sustained period could result in a downgrade.
Triggers for a downgrade (QBELMI): A downgrade of QBE's ratings could result in a downgrade of QBELMI's rating despite limited financial reliance on the group. Fitch would not typically rate a group member more than one to three notches above the group assessment.
Triggers for a downgrade (GMA): A sudden increase in the dividend payout ratio, should GNW's credit profile deteriorate may also cause Fitch to place greater reliance on group linkages, which could cause a negative rating action. The agency does however recognise that the dividend payout ratio could increase in the future, should growth slow and the requirement for increased capital moderate.
Triggers for an upgrade (QBELMI): Fitch believes a ratings upgrade for QBELMI is unlikely in the near term given the company's profile, which, as a monoline insurer, results in a narrow product focus. An upgrade of QBELMI's rating would require an upgrade of the group's ratings.
Triggers for an upgrade (GMA): GMA's rating is constrained by the weak credit profile GNW. Fitch believes that in order for an issuer to attain a rating in the 'AA' category there should be no constraint on its financial flexibility. For GMA to attain a 'AA-' rating under the current ownership structure the agency would expect to see no more than a one to three notch differential with the main operating subsidiaries of GNW.
KEY RATING DRIVERS (QBELMI and GMA)
The operating environment and macroeconomic conditions are important rating drivers and despite a period of below trend growth, the Australian economy is relatively sound. The unemployment rate was 6% in June 2015 and has hovered slightly above this level over the past 18 months. Household leverage is at historic highs and falling mortgage rates have supported rapid price appreciation in the major Sydney and Melbourne housing markets. However, a conservative underwriting approach increasingly focused on serviceability, has resulted in mortgage debt concentrated in higher income households, with better debt servicing ability.
Interest and competition in the lenders mortgage insurance (LMI) sector has increased in recent years, although regulatory requirements are significant and customer relationships have proven sticky. The major banks continue to use LMI to transfer risk despite little if any capital relief and the product is not as price sensitive as other types of insurance. The relationships between Australian lenders and the LMIs tend to change infrequently. Typically renewed on a multiyear basis once the infrastructure is in place, LMI involves little direct additional cost for the lender, given the policy premium is paid for by the borrower.
KEY RATING DRIVERS (QBELMI)
The company's 'AA-'/Stable rating reflects a robust standalone credit profile which includes strong capital ratios and a major position in the Australian LMI sector. Solid operating performances and no debt, support financial flexibility, and internally generated capital is able to support growth if required.
QBELMI is able to attain a higher standalone rating than the main subsidiaries of its ultimate parent, QBE Insurance Group Ltd (QBE; main subsidiaries' IFS 'A+'/Negative). This is due to the strength of the regulatory ring fencing around QBELMI and its limited financial reliance on the group as a whole.
QBELMI's coverage of its regulatory prescribed capital amount (PCA) increased to a strong 1.51x at end-2014 (end-2013: 1.34x). The ratio was supported by growth in retained profits in addition to a reduction in capital requirements. The company ceded a greater share of risks underwritten in 2014 through an expanded quota share reinsurance arrangement. A large reduction in claim reserve risk margins and a change in premium recognition supported profits in 2014, although reduced the level of surplus in the capital calculation. Despite a reduction in risk margins they are still significantly above the central estimate.
QBELMI's profitability in 2014 was positively impacted by reserve adjustments but nonetheless has been consistently strong. Its average pre-tax ROA and ROAE was 13% and 17%, respectively, in the five years to end-2014 while its average loss ratio over this period was a low 13%.
KEY RATING DRIVERS (GMA)
The company's 'A+'/Stable rating reflects a robust standalone credit profile, which includes strong capital ratios, a conservative investment approach and a leading market position in a niche insurance sector with high barriers to entry. A favourable operating environment has supported earnings and the company's financial flexibility was enhanced by improved capital market access following its partial IPO in 2014. Constraining the rating is the weak credit profile of the majority shareholder, Genworth Financial Inc (GNW).
GMA is able to achieve a higher rating than the US life operating subsidiaries (IFS Ratings 'BBB'/Negative) of GNW, as a result of the strength of the regulatory ring-fencing in Australia and substantial minority shareholder base (48%). Fitch considers GNW constrained from undertaking capital actions that would weaken the credit profile of GMA for regulatory and business reasons. In the agency's opinion GNW would be limited to a further or complete sell down in its stake in GMA if it wanted to repatriate a significant level of capital from the Australian operations.
GMA's coverage of its regulatory prescribed capital amount (PCA) was a strong 1.59x at end-2014. Fitch expects that GMA will continue to generate a significant level of capital through strong earnings, and the PCA is likely to fall overtime, should regulatory pressure to slow the growth of higher LVR (more capital intensive business) continue. Any increased risk in the investment portfolio will provide some offset to a decline in the PCA.
RATING SENSITIVITIES
Triggers for a downgrade (QBELMI and GMA): A severe deterioration in the operating environment as a result of rising unemployment and other macroeconomic factors remains the most serious threat to the ratings of QBELMI and GMA. However, Fitch continues to see this as unlikely and is forecasting a relatively solid economic performance in coming years.
Coverage of QBELMI's or GMA's PCA falling below 1.3x for a sustained period could result in a downgrade.
Triggers for a downgrade (QBELMI): A downgrade of QBE's ratings could result in a downgrade of QBELMI's rating despite limited financial reliance on the group. Fitch would not typically rate a group member more than one to three notches above the group assessment.
Triggers for a downgrade (GMA): A sudden increase in the dividend payout ratio, should GNW's credit profile deteriorate may also cause Fitch to place greater reliance on group linkages, which could cause a negative rating action. The agency does however recognise that the dividend payout ratio could increase in the future, should growth slow and the requirement for increased capital moderate.
Triggers for an upgrade (QBELMI): Fitch believes a ratings upgrade for QBELMI is unlikely in the near term given the company's profile, which, as a monoline insurer, results in a narrow product focus. An upgrade of QBELMI's rating would require an upgrade of the group's ratings.
Triggers for an upgrade (GMA): GMA's rating is constrained by the weak credit profile GNW. Fitch believes that in order for an issuer to attain a rating in the 'AA' category there should be no constraint on its financial flexibility. For GMA to attain a 'AA-' rating under the current ownership structure the agency would expect to see no more than a one to three notch differential with the main operating subsidiaries of GNW.
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