(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.