RPT-Fitch affirms Insurance Australia Group at 'AA-'/stable
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Dec 16 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Insurance Australia Group's (IAG) core operating subsidiaries, Insurance Australia Limited (IAL) and IAG New Zealand Limited (IAGNZ), at Insurer Financial Strength (IFS) 'AA-'. The Outlook is Stable.
The rating affirmation took place prior to the announcement of the proposed acquisition of Wesfarmers' insurance underwriting operations. Fitch is currently reviewing the impact this will have on IAG's ratings. The agency expects to complete its review shortly.
KEY RATING DRIVERS
The rating affirmation reflects IAG's dominant market position in its core markets, solid franchise and brand strength, a conservative investment approach, low financial leverage, extensive reinsurance programme, adequate capital ratios, and good operating outlook.
IAG currently holds an approximate 22% and 40% share of the Australian and New Zealand non-life insurance markets, respectively. Moreover, despite competition from new entrants and insurance being increasingly offered through non-traditional channels, IAG has maintained its market shares (excluding acquisitions), and at the same time strengthened its operating performance. Fitch considers asset risk in IAG's investment portfolios to be low, with 89% of total investments (including operational cash) at 30 June 2013 (FYE13) consisting of cash or fixed-income securities. IAG's 'risky' assets as a share of total equity increased slightly to 41% at FYE13, compared to 36% at FYE12, as the company increased its exposure to equities. However, this still sits within Fitch's 'AA' median criteria guideline of 50%.
Credit quality remains at a conservative level with 86% of cash and fixed-income investments at FYE13 rated 'AA-' or higher, and unchanged from FYE12. Fitch calculates that IAG's equity-adjusted debt-to-capital ratio at FYE13 was 14% (FYE12: 15%), well within Fitch's 'AA' median criteria guideline of 20%. Fitch considers strong capital ratios to be appropriate for IAG's high rating category. Coverage of the regulatory prescribed capital amount (PCA) was 1.67x at FYE13 under the Australian Prudential Regulation Authority's updated capital adequacy calculations. Moreover, Fitch will now give equity credit to Tier 2 instruments in its assessment of capital adequacy, following the inclusion of more aggressive loss absorption features and regulatory non-viability triggers.
Key rating triggers for a downgrade include: an unexpected weakening of capital ratios; significant operating underperformance relative to peers; a weakening of the group's competitive position in its key markets; and an aggressive escalation or risk management failure in the group's Asian strategy.
Over the longer term, financial leverage above 25%, EBITDA interest coverage below 9x, reserve deficiencies or a sustained period of underwriting underperformance such as a persistent combined ratio in excess of 100%, could result in a downgrade.
There is little prospect of IAG's rating being upgraded in the near term.