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Fitch Affirms Suncorp Group and Subsidiaries
March 6, 2014 / 3:16 AM / 4 years ago

Fitch Affirms Suncorp Group and Subsidiaries

(The following statement was released by the rating agency) SYDNEY, March 05 (Fitch) Fitch Ratings has affirmed all the ratings of Suncorp Group Limited (SGL) and its main operating subsidiaries: AAI Limited (AAI) and Suncorp-Metway Limited (SML). A full list of rating actions is provided at the end of this rating action commentary. Suncorp-Metway Insurance Limited's (SMIL) IFS rating has been withdrawn following a legal entity reorganisation and the transfer of all insurance liabilities to AAI. SMIL no longer exists as a legal entity. KEY RATING DRIVERS - SGL's IDR and AAI's IFS The affirmation of SGL's Issuer Default Rating (IDR) and Stable Outlook reflects the affirmation of AAI's Insurer Financial Strength (IFS) rating and Stable Outlook. SGL benefits from a large financial services footprint, which includes a very strong non-life business, and simple life and banking businesses. The organisational and operational improvements from a to-date successfully implemented simplification strategy, have driven a stronger operating performance over the 18 months to end-1H14, and Fitch expects will support a solid future performance. Capital ratios are strong. At end-1H14 AUD1.3bn was held by the group, above internal targets. The group holds most of its surplus within the non-life operations but, since its reorganisation to a non-operating holding company structure, has increasingly held surplus capital at SGL. As a regulated entity, capital is fungible and available to all the operating entities should it be required. The affirmation of AAI's IFS rating and Stable Outlook reflect its strong business franchise and brands, as well as its dominant market position in Australia's non-life insurance sector. Solid premium rate increases and operational improvements, including better risk selection and pricing, and a focus on claims and expense management, has supported AAI's earnings performance. The affirmation also reflects the group's continued conservative approach to investments, reserving and financial leverage, within AAI and wider non-life group. Across the non-life group investment portfolios are heavily weighted towards highly rated fixed-income securities. At end-1H14, 93% of total investments were in fixed-income securities, 78% of these being rated 'AA-' or higher. Exposure to equities is low and as a result the 'risky' asset to equity ratio of 9% is very low relative to Fitch median criteria guidelines. Reserving across the group is strong and has historically produced large claims reserve redundancies, although these have trended lower over the 18 months to end-1H14. The group maintained a 90% probability of adequacy in its claims reserves and at end-1H14 held risk margins above its central estimate claims reserves of AUD984m. In the five years to FYE13, positive prior-period movements have averaged 5% of opening equity. RATING SENSITIVITIES - SGL's IDR and AAI's IFS RATING SGL's IDR is likely to move in line with AAI's IFS rating. A positive rating action is unlikely. This is because 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 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, if it damages the franchise value and if 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. KEY RATING DRIVERS - SML's IDRs, SUPPORT RATING and SENIOR DEBT The bank's IDRs, Support Rating and senior debt ratings reflect an extremely high likelihood of support from the group if required, as Fitch views SML as a core member of SGL. The ability to provide support is strong, as reflected by capital surplus to internal targets. As a result, SML's IDRs and Stable Outlook are aligned with AAI's IFS rating. RATING SENSITIVITIES - SML's IDRSs, SUPPORT RATING and SENIOR DEBT SML's IDRs and senior debt ratings are likely to move in line with any movement in the IFS rating of AAI. A downgrade of the IDRs, Support Rating and senior debt ratings is likely should SML no longer be considered core to SGL. A significant reduction in the group's ability to support SML, as measured by capital surplus to minimum targets, without a commensurate improvement in SML's intrinsic creditworthiness, as measured by the Viability Rating (VR), may also place downward pressure on the ratings. KEY RATING DRIVERS - SML's VR The bank's Viability Rating (VR) reflects its sound core profitability and asset quality, improving capitalisation, and the operational benefits of being part of SGL, such as brand sharing, fungibility of capital for growth, cross-sell capacity, and close management interaction. These factors are offset by a reliance on wholesale funding and recent strong loan growth which may put pressure on asset quality, profitability and funding in future periods. The sale of most of the remaining non-core loans during 2013 was a credit positive, consolidating the bank at its current VR level. Asset quality improved significantly as a result of the sale, with SML's impaired loan ratio now at the low end compared to domestic peers, with further improvements expected as the remaining non-core exposures are exited. Fitch expects some manageable deterioration in the asset quality of the core portfolio during 2014 due to a modest weakening of the operating environment, although there is some downside risk given SML's recent strong loan growth has yet to fully season. SML's reliance on wholesale funding is being gradually reduced as the funding for the legacy non-core bank matures. Liquid asset holdings including internally-securitised mortgages, cover almost all wholesale debt maturities in 2014 and provide a strong buffer to funding market dislocation. All liquid assets are eligible for the Reserve Bank of Australia's repurchase facility. Standalone capitalisation is improving, with Fitch core capital/risk-weighted assets at 8.91% at end-1H14, and significant group surplus capital could be quickly channelled to the bank should it be required. SML targets a minimum Basel III common equity Tier 1 ratio of 8% - it was 8.25% at end-1H14. Profitability is also likely to improve further in 2014 as the legacy funding associated with the non-core assets matures, reducing the drag it has on earnings. RATING SENSITIVITIES - SML's VR SML's VR could be downgraded should asset quality worsen substantially, possibly as a result of strong loan growth, which could weaken its funding and liquidity profile, or a significant deterioration in the operating environment. An upgrade of SML's VR would require evidence that the bank's strong loan growth has not had a negative impact on asset quality and profitability, as well as further strengthening of the funding profile and profitability. KEY RATING DRIVERS AND RATING SENSITIVITIES - SML's SUPPORT RATING FLOOR The Support Rating Floor reflects SML's limited market share, with Fitch factoring in a moderate probability of support from the Australian authorities. The Support Rating Floor is potentially sensitive to any change in assumptions around the propensity or ability of the Australian authorities to provide timely support to the bank. The Floor is vulnerable to global regulatory initiatives aimed at reducing the implicit government support available to banks. KEY RATING DRIVERS AND RATING SENSITIVITIES - SML's SUBORDINATED DEBT SML's subordinated debt is rated one notch below its Long-Term IDR rather than its VR to reflect Fitch's expectation that SGL has the propensity and ability to support these instruments if needed, as per Fitch's criteria "Assessing and Rating Bank Subordinated and Hybrid Securities" dated 31 January 2014. The subordinated debt ratings are broadly sensitive to the same considerations that might affect SML's Long-Term IDR. The rating actions are as follows: Suncorp Group Limited (SGL) Long-Term IDR: affirmed at 'A'; Outlook Stable; Short-Term IDR: affirmed at 'F1'. Suncorp-Metway Limited (SML): Long-Term IDR: affirmed at 'A+'; Outlook Stable; Short-Term IDR: affirmed at 'F1'; Viability Rating: affirmed at 'bbb+'; Support Rating: affirmed at '1'; Support Rating Floor: affirmed at 'BB+'; Government-guaranteed debt: affirmed at 'AAA'; AUD domestic medium-term note programme: affirmed at 'A+'/'F1'; USD15bn euro medium-term note programme: affirmed at 'A+'/'F1'; Senior unsecured debt: affirmed at 'A+'; Commercial paper: affirmed at 'F1'; and Subordinated debt: affirmed at 'A'. Suncorp Metway Insurance Ltd (SMIL): Insurer Financial Strength: withdrawn. AAI Limited: Insurer Financial Strength: affirmed at 'A+'; Outlook Stable. Contacts: Primary Analysts John Birch (SGL, SMIL and AAI) Director +61 2 8256 0345 Fitch Australia Pty Ltd, Level 15, 77 King Street, Sydney, NSW 2000 Tim Roche (SML) Senior Director +61 2 8256 0310 Secondary Analysts Tim Roche (SGL, SMIL and AAI) Senior Director +61 2 8256 0310 John Birch (SML) Director +61 2 8256 0345 Committee Chairmen Jeff Liew (SGL,SMIL and AAI) Senior Director +852 2263 9939 Mark Young (SML) Managing Director +65 6796 7229 Applicable criteria, "Insurance Rating Methodology" dated 13 November 2014, "Global Financial Institutions Rating Criteria" dated 31 January 2014, "Assessing and Rating Bank Subordinated and Hybrid Securities" dated 31 January 2014, and "Rating FI Subsidiaries and Holding Companies" dated 10 August 2012, are available at www.fitchratings.com. Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: iselle.gonzalez@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable Criteria and Related Research: Insurance Rating Methodology here Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Rating FI Subsidiaries and Holding Companies here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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