30.07.2015, 16:09
Fitch Upgrades Suncorp's IFS Rating to 'AA-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has upgraded Suncorp Group Limited's (SGL) Long-term Issuer Default Rating (IDR) to 'A+' from 'A', and the Insurer Financial Strength (IFS) Rating of its Australian non-life operating subsidiary, AAI Limited (AAI) to 'AA-' from 'A+'. At the same time, Fitch has affirmed SGL's Short-term IDR at 'F1'. The Outlooks are Stable.
The ratings reflect Fitch's recently updated notching criteria for the insurance sector, published on 14 July 2015. This followed publication of an initial exposure draft of proposed criteria on 12 May 2015. The updated notching criteria appear in Section VI of the insurance master criteria report 'Insurance Rating Methodology'.
The upgrade of the IFS rating reflects the realignment of the group's rating with peers and recognises the strength of the group's non-life insurance franchise within Australia and New Zealand, and robust financial profile. SGL is the largest non-life insurer in Australia by premium volume (around 22% of direct premiums) and the second largest non-life insurer in New Zealand (around 25% of total premiums).
The upgrade of SGL's IDR is a result of Fitch's classification of the Australia regulatory environment. The agency classifies Australian regulation as being a 'Group Solvency' environment and believes core group members at both the operating and holding company levels share the same risk of default. As a result the IDR of SGL is aligned with the implied IDR of AAI.
The ratings of SGL's banking subsidiary, Suncorp-Metway Limited (SML, IDR A+/Stable) are unaffected by these changes.
KEY RATING DRIVERS
SGL and AAI's ratings reflect a franchise supported by strong brands and large customer footprint. The group is one of the dominant Australian and New Zealand non-life insurers, in addition to its sizeable life and banking operations. The group is the sixth largest life insurer and bank in Australia.
The group has been able to maintain a dominant market position, and has strengthened its operating performance and earnings despite increased competition from new entrants, and insurance increasingly being offered through non-traditional distribution channels.
The group's gross exposures to catastrophes and a greater frequency of large losses are well managed through comprehensive reinsurance program, capital ratios are robust, the investment approach is conservative and reserving has been historically sound.
Offsetting the strength of the insurance operations is the large banking operations and weaker relative standalone credit profile of SML. Total group assets of AUD95bn at end-1H15 were dominated by AUD62bn of banking assets, although the risk profile of the bank improved following the sale and run-off of a poorly performing non-core book of assets. Fitch upgraded SML's Viability Rating to 'a-' in February 2015.
RATING SENSITIVITIES
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. It 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 it coincides with weaker performance in the banking or life operations, it damages the franchise value, or leads to lower capital ratios. Profitability in the non-life operations is currently 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 be in excess of 100%, and insurance trading ratios below 10% over an extended period.
The ratings reflect Fitch's recently updated notching criteria for the insurance sector, published on 14 July 2015. This followed publication of an initial exposure draft of proposed criteria on 12 May 2015. The updated notching criteria appear in Section VI of the insurance master criteria report 'Insurance Rating Methodology'.
The upgrade of the IFS rating reflects the realignment of the group's rating with peers and recognises the strength of the group's non-life insurance franchise within Australia and New Zealand, and robust financial profile. SGL is the largest non-life insurer in Australia by premium volume (around 22% of direct premiums) and the second largest non-life insurer in New Zealand (around 25% of total premiums).
The upgrade of SGL's IDR is a result of Fitch's classification of the Australia regulatory environment. The agency classifies Australian regulation as being a 'Group Solvency' environment and believes core group members at both the operating and holding company levels share the same risk of default. As a result the IDR of SGL is aligned with the implied IDR of AAI.
The ratings of SGL's banking subsidiary, Suncorp-Metway Limited (SML, IDR A+/Stable) are unaffected by these changes.
KEY RATING DRIVERS
SGL and AAI's ratings reflect a franchise supported by strong brands and large customer footprint. The group is one of the dominant Australian and New Zealand non-life insurers, in addition to its sizeable life and banking operations. The group is the sixth largest life insurer and bank in Australia.
The group has been able to maintain a dominant market position, and has strengthened its operating performance and earnings despite increased competition from new entrants, and insurance increasingly being offered through non-traditional distribution channels.
The group's gross exposures to catastrophes and a greater frequency of large losses are well managed through comprehensive reinsurance program, capital ratios are robust, the investment approach is conservative and reserving has been historically sound.
Offsetting the strength of the insurance operations is the large banking operations and weaker relative standalone credit profile of SML. Total group assets of AUD95bn at end-1H15 were dominated by AUD62bn of banking assets, although the risk profile of the bank improved following the sale and run-off of a poorly performing non-core book of assets. Fitch upgraded SML's Viability Rating to 'a-' in February 2015.
RATING SENSITIVITIES
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. It 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 it coincides with weaker performance in the banking or life operations, it damages the franchise value, or leads to lower capital ratios. Profitability in the non-life operations is currently 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 be in excess of 100%, and insurance trading ratios below 10% over an extended period.
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