May 5, 2017 / 7:56 AM / 4 months ago

Fitch Affirms Ratings on Suncorp Group Limited, AAI Limited

(The following statement was released by the rating agency) SYDNEY/SINGAPORE, May 05 (Fitch) Fitch Ratings has affirmed Suncorp Group Limited's (SGL) Long- and Short-Term Issuer Default Ratings (IDR) at 'A+' and 'F1', respectively. At the same time, Fitch has affirmed SGL's main non-life insurance operating subsidiary AAI Limited's IDR at 'A+', Insurer Financial Strength rating at 'AA-' and subordinated debt at 'A'. The Outlooks are Stable. KEY RATING DRIVERS The affirmations reflect SGL's and AAI's strong brands and franchise, solid operating performance, comprehensive reinsurance programmes, robust capital ratios, modest financial leverage, conservative investment approach and historically sound non-life reserving. Offsetting these strengths to some extent is SGL's subsidiary Suncorp-Metway Limited's (SML, A+/Stable) large banking exposure and weaker standalone profile (Viability Rating: a-). However, SML's improved risk profile and operating performance is credit positive. SGL is Australia's second-largest non-life insurer and eighth-largest life insurer by premium volume. It is also Australia's seventh-largest bank by domestic assets and New Zealand's second-largest non-life insurer by premium volume. Fitch believes the group achieves a significant competitive advantage as a leading, large and long-established financial services provider. A large customer base of approximately nine million and range of strong brands provides the group with opportunity to broaden existing relationships. SGL's simplification and optimisations programmes, which first began in 2009, have supported stronger group performance over 30 months to financial half-year end-2016 (1H17) compared with the previous three years. The group reported a solid net profit after tax of AUD537 million in 1H17, up 6% from 1H16, following stronger performance in the Australian non-life business, which was partially offset by weaker earnings in the Australian life and New Zealand insurance businesses. Fitch considers insurance risk to be mitigated through solid reinsurance arrangements. SGL's main property catastrophe programme for FY17 provides cover of up to AUD6.9 billion against an extreme loss event and net retention of AUD250 million at end-1H17 was a modest 3% of the non-life division's net assets. Additional aggregate cover purchased for FY17 provides AUD300 million of cover against an increased frequency of smaller natural hazard events (over AUD5 million). At end-1H17, AUD232 million of the AUD460 million deductible had been eroded. Capital levels remain strong, with surplus capital significantly above high internal regulatory targets. The group held AUD1.4 billion (pre-dividend) of capital at end-1H17, above internal targets and AUD831 million above common equity Tier 1 targets. Fitch considers capital to be fungible and assesses capital adequacy at a group level. Assessed through the agency's proprietary Prism Factor Based Capital Model, capitalisation is assessed as 'extremely strong'. The insurance investment portfolios are conservatively positioned, with 96% of investments (excluding investments backing participating and annuity policies) held in cash or highly rated fixed-income securities at end-1H17. Equity exposure is minimal and, as a result, SGL's insurance risky asset/equity ratio of 5% at end-1H17 is low relative to Fitch's median criteria guidelines. Reserving across the non-life division is strong and has historically produced large claim reserve redundancies. A conservative reserving bias, improved claims management and sustained strong risk margins have supported positive prior-period reserve development, which averaged 3% a year of SGL's opening equity (excluding banking net assets) in the five years to FYE16. 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. Positive rating action would require a stronger standalone profile for SML, an extended period of robust operating performance across all businesses and, at 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 the deterioration coincides with weaker banking or life operation performance, damages franchise value or leads to lower capital ratios. Profitability in the non-life operations remains 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 exceed 100% and insurance trading ratios fall below 10% over an extended period. Contact: Primary Analyst John Birch Director +61 2 8256 0345 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Siew Wai Wan Senior Director +65 6796 7217 Committee Chairman Stephan Kalb Senior Director +49 69 768076 118 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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