OREANDA-NEWS. Fitch Ratings has affirmed the Insurer Financial Strength Rating for Australia-based Genworth Mortgage Insurance Australia Ltd's (GMA) operating subsidiary, Genworth Financial Mortgage Insurance Pty Limited (GFMI) at 'A+'. The Outlook is Stable.

The IFS Rating affirmation is underpinned by GMA's robust standalone credit profile, solid operating performance, strong capital ratios and conservative investment approach. A favourable operating environment continues to support the performance of the insurance portfolio, and delinquency rates remain low.

Capital market access supports GMA's financial flexibility, although the weak credit profile of the majority shareholder, Genworth Financial Inc (GNW) is a constraint on the rating.

KEY RATING DRIVERS
GMA achieves a higher rating than the US 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.

The operating environment and macroeconomic conditions in Australia are important rating drivers and despite a period of below trend growth, the Australian economy is relatively sound. The unemployment rate was unchanged month on month at 5.8% in December 2015 which has been its lowest level over the past 20 months. Fitch expects a stable labour market to support GMA's operating performance although regional pockets of weakness are likely to occur particularly where exposure to the mining industry is high.

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 relatively conservative underwriting approach, increasingly focused on serviceability has resulted in mortgage debt being concentrated in higher income households, with better debt servicing ability.

Regulatory action in 2015 to improve banks' mortgage lending standards has significantly reduced lenders mortgage premium volumes. The Australian Prudential Regulatory Authority has indicated that underwriting standards had weakened as a result of strong competition in the mortgage market. This is and will continue to have a negative impact on GMA's top line growth although the quality of the risks being underwritten will have strengthened.

GMA's coverage of its regulatory prescribed capital amount (PCA) was a strong 1.67x at 30 September 2015. Fitch expects that GMA will continue to generate a significant level of capital through strong earnings, and the PCA is likely to fall should regulatory pressure to slow the growth of higher LVR (more capital intensive business) continue. Any increase in risk in the investment portfolio will provide some offset to a decline in the PCA.

RATING SENSITIVITIES
Triggers for a downgrade: A very severe housing downturn, most likely due to a sharp rise in unemployment and other deteriorating macroeconomic conditions, would constitute the most serious threat to GMA's rating. However, Fitch considers this unlikely and is forecasting a relatively solid Australian economic performance over the coming years.

The company's coverage of its PCA falling below 1.3x for a sustained period could result in a downgrade. 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 is likely to remain high due to lower new business volumes, capital initiatives and no requirement for additional capital to support growth.

Triggers for an upgrade: GMA's rating is constrained by the weak credit profile of 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.