Fitch Affirms Ratings on Suncorp Group Limited, AAI Limited
KEY RATING DRIVERS - SGL's IDR and AAI's IFS
The affirmations reflect SGL's and AAI's strong brands and franchise, solid and improving operating performance, comprehensive reinsurance programme, robust capital ratios and moderate financial leverage, conservative investment approach and historically sound non-life reserving.
Offsetting these strengths to some extent is the large banking exposure within SGL's subsidiary Suncorp-Metway Limited (SML, A+/Stable), and its weaker standalone profile (viability rating: 'bbb+').
SGL is the largest non-life insurer in Australia, second largest in New Zealand by premium volume, and sixth largest life insurer and bank (by residential assets) in Australia. Moreover, the group has maintained a strong competitive position despite increased competition and new market participants.
Operational efficiencies gained as part of SGL's simplification program have supported earnings. In the financial half-year ended 31 December 2014 (1H15), the life division earnings have stabilised following the negative earnings impact in FY14 of higher lapse and claims assumptions, the bank's contribution to earnings continues to improve, and the non-life result remained strong. Net profit after tax was AUD631m in the half compared to AUD730m for the full year in FY14.
Fitch considers insurance risk to be well mitigated through solid reinsurance arrangements. SGL's property catastrophe programme for the financial year ending 30 June 2015 (FY15) provides cover of up to AUD6.1bn against an extreme loss event, and after the Brisbane hail storm, the group's net retention to a single large event at end-1H15 was AUD200m. The net retention at end-1H15 was a relatively modest 2.5% of the non-life division's net assets.
Capital ratios are strong. At end-1H15, AUD1.3bn (ex-dividend) were held by the group, above internal targets, and AUD627m above common equity Tier 1 targets. The group holds most of its surplus within the non-life division but following its reorganisation to a non-operating holding company structure, also holds surplus capital at SGL. As a regulated entity, Fitch considers capital to be fungible and available to all the operating entities if required.
In the insurance divisions investment portfolios are heavily weighted towards highly rated fixed-income securities. At FYE14, Fitch calculated around 93% of total insurance investments were in fixed-income securities, 74% of which were rated 'AA-' or higher. Equity exposure is low and as a result the 'risky' asset to equity ratio of 6% is very low relative to Fitch's median criteria guidelines.
Reserving across the non-life division is strong and has historically produced large claims reserve redundancies. A conservative reserving bias, improvements in claims management and the maintenance of strong risk margins have supported positive prior-period reserve development. SGL's prior-period development has averaged 3% a year of the non-life divisions opening equity in the five years to FYE14.
RATING SENSITIVITIES - SGL's IDRs and AAI's IFS RATING
SGL's IDRs are likely to move in line with AAI's IFS rating.
A 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 it 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.