(Repeat for additional subscribers)
April 24 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Australia-based Westpac Lenders Mortgage Insurance Limited's
(WLMI) Insurer Financial Strength Rating (IFS) at 'AA-'. The Outlook is Stable.
Key Rating Drivers
The affirmation of WLMI's IFS rating and Stable Outlook reflects the company's
solid financial profile, which includes a robust standalone capital position and
conservative investment approach. WLMI's operating performance has been strong
as evidenced by historically low loss ratios, although absolute levels of profit
have fallen on lower levels of risk retention and net written premiums.
Actions taken over the last five years to reduce the level of risk retained
within WLMI remain in place. The risk profile of WLMI's insurance portfolio was
reduced following the decision to cease insuring mortgages with a loan/value
ratio (LVR) greater than 90% from June 2009, and from fiscal year 2012 (FY12)
the company's quota share reinsurance arrangements were expanded to include the
proportional cessation of 60% of all new risks.
As a result of a reduced risk appetite and the run-off of higher LVR - and more
capital intensive - risks, the company continues to generate significant levels
of surplus capital. This has enabled the company to repatriate capital back to
its ultimate parent Westpac Banking Corporation ('WBC': IDR 'AA-'/Stable) in
excess of annual profits while retaining a strong stand alone capital position.
In Fitch's opinion, WLMI would have sufficient capital to withstand a range of
severe downturn scenarios, although in the more severe scenarios WLMI would most
likely require recapitalisation to continue to operate within prudential
guidelines. In such a scenario, the agency believes WBC would be willing and
capable of providing such support.
Net profits after tax declined 36% to AUD42m in FY13 from FY12 as a result of
lower premium volumes and investment income. WLMI's investments were reduced by
26% to AUD450m following the AUD135m repatriation of capital. Moreover, net
earned premiums fell 21% to AUD68m and will continue to decline as the level of
prior period written premiums exceeds current levels.
The weaker economic environment in the state of Queensland and lower
underwriting standards of 2008 and 2009 continue to impact the claims expense,
and WLMI reported a loss ratio of 37% in FY13, which is above long run historic
levels. However, Fitch expects the tightening of underwriting standards adopted
from mid-2009, in addition to the current strength of the Australian housing
market, to support a stronger future claims experience.
Through holding a geographically diverse mortgage portfolio, WLMI's exposure to
any one state or region is reduced. Fitch considers this diversification to be
important given that periods of economic stress in Australia have historically
varied considerably at a state and regional level.
There is little prospect of WLMI's rating being upgraded as this would require
an uplift from the group rating which was affirmed in October 2013.
The key rating driver that could lead to a downgrade is a deteriorating economic
environment that ultimately leads to a weakening of WLMI's capital position. In
the unlikely event that capital support is not forthcoming from WBC, WLMI may
find itself unable to meet high minimum regulatory capital requirements.
A deteriorating economic environment could affect the credit profiles of WBC and
WLMI due to both having a significant exposure to the Australian residential
property sector. If WBC's ratings were to be downgraded due to weakness outside
of the residential mortgage sector, this would be likely, but not automatically,
to lead to a downgrade of WLMI.