S&P: Ratings On Eight Insurance Entities Of Australian Major Banks Lowered To Reflect Revised Expectation Of Parent Support
The Colonial Mutual Life Assurance Society Ltd. (CMLA); The Colonial Mutual Life Assurance Society Ltd. (NZ Branch) (CMLA NZ Branch); OnePath Life Ltd.; OnePath Life (NZ) Ltd.; Westpac Life Insurance Services Ltd. (WLIS); and Westpac Life-NZ-Ltd. At the same time, we have lowered our long-term ratings on the intermediate holding companies, Colonial Holding Co. Ltd. (CHC) and ANZ Wealth Australia Ltd. (ANZ Wealth), to 'A' from 'A+', and affirmed the respective short-term ratings on the companies at 'A-1'.
The outlooks on the ratings on CMLA, CMLA NZ Branch, OnePath Life Ltd., WLIS, CHC, and ANZ Wealth are stable, and the outlooks on our long-term ratings on OnePath Life NZ Ltd. and Westpac Life-NZ-Ltd. remain negative. At the same time, we have affirmed our 'AA-' ratings on Westpac Lenders Mortgage Insurance Ltd. (Westpac LMI). The outlook on Westpac LMI remains negative.
The downgrades reflect our view that the strategic link of the affected insurance companies and their intermediate holding companies to the parent groups is weaker than what we previously considered. We previously assessed these companies as being core subsidiaries of their parent banking groups, which comprise Australia and New Zealand Banking Group Ltd. (ANZ), CommonwealthBank of Australia, and Westpac Banking Corp. (all three rated AA-/Negative/A-1+).
In particular--contrary to our previously held view---we now consider that these entities may be severed from the parent banking groups, and operated as, or sold on as ongoing businesses. Consequently, we no longer consider that financial support from the parent groups, if needed, will be absolute and timely under all foreseeable situations. We note that National Australia Bank Ltd. (NAB) and Macquarie Group Ltd. sold their insurance businesses in the past year. Our rating actions do not indicate any weakening in the stand-alone credit profiles (SACPs) of these insurance subsidiaries.
In addition, the more progressive prudential regulators globally, including the Australian Prudential Regulation Authority and Reserve Bank of New Zealand, are increasing supervisory scrutiny of, and taking measures to ensure that, group boards understand and prudently manage the risk of contagion within conglomerate groups. These measures include transitioning foreign branches into subsidiaries to ensure local capitalization, adequate capitalization at each prudentially regulated institution, and severability of governance and risk management functions.
We assess the strategic importance of a group entity on a five-point scale of reducing importance to the group: core, highly strategic, strategic, moderately strategic, and nonstrategic (see criteria titled, "Group Rating Methodology," published to RatingsDirect on Nov. 19, 2013). These categories indicate our view of the likelihood that an entity will receive support from the group. We then apply an uplift to the rating on the subsidiaries above their SACPs based on the assessed strategic importance. For the extreme ends of the scale, we would generally equalize the rating on a core subsidiary with the group credit profile (GCP) and not assign any rating uplift above the SACP for a nonstrategic subsidiary.
CMLA, CMLA NZ BRANCH, WLIS, AND WESTPAC LIFE-NZ-LTD. We consider that CMLA, WLIS, and Westpac Life-NZ-Ltd. remain highly strategically important to their respective parent banking groups--although we consider that this strategic importance to the parent groups is slightly weaker than what we previously considered. In this assessment, we take into account our view that each of these subsidiaries continues to show the following characteristics:
Is highly unlikely to be sold; Operates in lines of business or functions integral to the overall group strategy. Its activities, products, and services are very closely aligned with the group's mainstream business and customer base and they operate in the same target markets; Has a strong, long-term commitment of support from the senior group management; Shows good operating and business performance; Is closely linked to the group's name and reputation; Forms less than 5% of the group's earnings and capital; and May be severed from the group, if needed. Consequently, we expect that timely financial support from their parent groups, if needed, will be forthcoming under almost all foreseeable situations, although under very limited situations the support may not be absolute or timely. We typically assign such subsidiaries a rating one notch below what we assess to be their parents' GCP, unless the subsidiary's SACP is at least equal to the GCP--in which case, we may rate such subsidiary at the GCP level.
Our SACP on each of CMLA and WLIS is 'a+', or only one notch below the 'AA-' issuer credit ratings (and GCPs) on their respective parent groups. Consequently, we have lowered the ratings on each of these entities by one notch. Furthermore, we expect that the ratings on these entities would remain unchanged even if we were to lower our rating on their respective parent banks by one notch. Hence, we have stable outlooks on the ratings in contrast to negative outlooks on our ratings on their respective parent banks. We equalize our rating and outlook on CMLA NZ Branch with those on CMLA.
We assess the SACP on Westpac Life-NZ-Ltd. as 'a'. Consequently, the lower rating on Westpac Life-NZ-Ltd. of 'A+' is the same as that on CMLA and WLIS; that is, one notch below the 'AA-' issuer credit ratings (and GCPs) on their respective parent groups. Nevertheless, if we were to lower our long-term rating on its parent bank by one notch, we would also expect to lower our ratings on Westpac Life-NZ-Ltd. to 'A'. At that rating, Westpac Life-NZ-Ltd. is one notch below the parent GCP, given its SACP is not at least equal to the GCP. Consequently, unlike CMLA and WLIS, our outlook on Westpac Life-NZ-Ltd. is also negative, in line with the outlook on our long-term rating on Westpac Banking Corp.
ONEPATH LIFE LTD. AND ONEPATH LIFE (NZ) LTD. We now assess OnePath Life Ltd. and OnePath Life (NZ) Ltd. to be strategically important to their parent group. Consequently, we expect that in periods of stress the parent group is likely to provide additional liquidity, capital, or risk transfers in most circumstances. We typically assign such subsidiaries a rating three notches above their own SACP, subject to a cap of one notch below what we assess to be their parents' GCPs. We assess OnePath Life Ltd.'s SACP to be 'a+', or only one notch below the 'AA-' issuer credit rating (and GCP) on the parent group. Consequently, we have lowered the ratings on OnePath Life Ltd. by one notch. Furthermore--similar to CMLA and WLIS--we expect the ratings on OnePath Life Ltd. to remain unchanged even if we were to lower our long-term rating on its parent bank by one notch. Hence--similar to CMLA and WLIS--we have a stable outlook on the long-term rating in contrast to a negative outlook on the parent bank rating.
Similar to Westpac Life-NZ-Ltd., we assess the SACP on OnePath Life (NZ) Ltd. as 'a'. Consequently, we have also lowered the rating on OnePath Life (NZ) Ltd. to 'A+'; that is, one notch below the 'AA-' issuer credit rating (and GCP) on its parent bank. Furthermore, if we were to lower our long-term rating on its parent bank by one notch, we would also expect to lower our rating on OnePath Life (NZ) Ltd. to 'A' (that is the one notch below the parent GCP, given its SACP is not at least equal to the GCP). Consequently, unlike OnePath Life Ltd., our outlook on OnePath Life (NZ) Ltd. is also negative, in line with the outlook on our long-term rating on ANZ.
In our opinion, the strategic importance of OnePath Life Ltd. and OnePath Life (NZ) Ltd. to their parent banking group is marginally weaker than is the case of CMLA, WLIS, and Westpac Life-NZ-Ltd. We consider that OnePath Life Ltd. and OnePath Life (NZ) Ltd. also show almost all the characteristics we have listed above for CMLA, WLIS, and Westpac Life-NZ-Ltd., with one significant difference; we do not consider it unlikely that OnePath Life Ltd. and OnePath Life (NZ) Ltd. may be sold in the near term, although we believe that their divestment would only be possible with the regulator's prior approval. In our assessment, we have taken into account repeated market reports in relation to ANZ's plans to sell its wealth and insurance businesses, as well as, increased focus within the ANZ group to rationalize its business lines and improved efficiency in capital allocation.
CHC AND ANZ WEALTH The long-term rating on the intermediate holding company, CHC, remains one notch below the core operating entity (CMLA) within its subgroup. Hence, we have also lowered the rating on CHC by one notch to 'A'. The outlook is stable. The same rationale applies for our downgrade of ANZ Wealth to 'A' (one notch below OnePath Life Ltd.) and stable outlook.
WESTPAC LMI In our assessment, Westpac LMI remains a core subsidiary of the Westpac Banking group. We remain of the opinion that Westpac LMI is fully integrated with the Westpac banking group and it is highly improbable to sever the subsidiary from the group as a stand-alone business because Westpac LMI is a captive provider of mortgage insurance for mortgages written by Westpac Banking Corp. in Australia. In addition, we believe that Westpac LMI shows all the other characteristics we have listed above for CMLA, WLIS, and Westpac Life-NZ-Ltd. We assign core subsidiaries ratings at the same level as the GCP. Hence, our long-term ratings and outlook on Westpac LMI remain 'AA-/Negative', in line with our long-term rating of 'AA-/Negative' on Westpac Banking Corp.
MLC LTD. AND NATIONAL WEALTH MANAGEMENT HOLDINGS LTD. Our ratings and outlook on MLC Ltd. and the intermediate holding company National Wealth Management Holdings Ltd. (NWMH) remain unchanged, at 'A+/Negative' and 'A+/Watch Neg' respectively. This is because our rating on MLC receives no uplift due to its ownership by NAB given that it is in the process of being sold, and we assess MLC as nonstrategic to the NAB group. Our long-term rating on NWMH remains on CreditWatch with negative implications, reflecting the uncertainty over its future role and financial structure following the sale of MLC.
We expect to reflect any significant changes in operating environment or the Australian major banks' strategies by further revising our assessment of the insurance subsidiaries' strategic importance to their parent groups, and consequently, our ratings on the insurance subsidiaries. In particular, we expect to consider any increase in likelihood of sale of an insurance subsidiary by the parent banking group as a signal of reducing strategic importance, and therefore, potentially a reduced uplift in the rating from the SACP.