September 13, 2017 / 12:14 AM / 10 months ago

Fitch Affirms Genworth Australia at 'A+'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE, September 12 (Fitch) Fitch Ratings has affirmed the Insurer Financial Strength Rating on Genworth Mortgage Insurance Australia Ltd's (GMA) operating subsidiary, Genworth Financial Mortgage Insurance Pty Limited (GFMI), at 'A+'. The Outlook is Stable. The affirmation of the IFS Rating is underpinned by GMA's robust standalone credit profile, solid operating performance, strong capital ratios and conservative investment approach. A generally stable operating environment continues to support the performance of the insurance portfolio. Delinquency rates have risen due to some regional weakness, but remain low overall. Capital market access supports GMA's financial flexibility, although the weak credit profile of the majority shareholder, Genworth Financial Inc (GNW), continues to be a constraint on the rating. KEY RATING DRIVERS GMA holds a leading market share in a niche sector, which is supported by high barriers to entry. We expect absolute profit levels to fall due to continued regulatory action in the Australian residential mortgage market. However, high regulatory requirements, resilient customer relationships and ongoing use of lenders' mortgage insurance (LMI) provide support for the sector. Banks continue to use LMI as a risk transfer mechanism even though there is little capital relief and premiums are not highly price sensitive. Gross written premiums declined 25% in 2016 to AUD382 million and 4% to AUD182m in 1H17 from a year earlier. This reflects the loss of business from Westpac Banking Corporation (AA-/Stable) and increased regulatory scrutiny in the residential lending market that has significantly reduced originations of loans with high loan-to-value (LVR) ratios. This continues to negatively affect GMA's top-line growth. Rising delinquencies and higher paid claims in areas of Queensland and Western Australia exposed to the resources sector pushed GMA's combined ratio higher to 61% in 2016, from 50% in 2015 and 45% in 2014. However, earnings remain within median guidelines for its ratings category. GMA's average pre-tax operating ROA was 7% and ROAE was 10% in the five years to end-2016. Its average loss ratio over this period was 36%, albeit with greater volatility. GMA's coverage of its regulatory prescribed capital amount (PCA) was a strong 1.81x at end- 1H17. Fitch expects GMA to continue generating significant capital through strong earnings, and for the PCA to continue to decline as regulators continue to try to reduce growth of higher LVR loans (more capital-intensive business). Australia's operating environment is stable and the economy remains sound despite below-trend growth. Interest rates are low, wage growth has been falling but unemployment rate remained broadly stable. Household leverage is high, although conservative underwriting has concentrated mortgage debt in higher-income households with better debt-servicing ability. RATING SENSITIVITIES Triggers for a downgrade: A severe deterioration in the operating environment due to rising unemployment and other macroeconomic factors is the most serious threat to GMA's rating. However, Fitch's base-case is that this is unlikely and the agency forecasts a solid economic performance in the coming years. Coverage of GMA's regulatory prescribed capital amount falling below 1.4x together with a marked deterioration in the company's underwriting performance - such as persistent combined ratios above 80% - could result in a downgrade. Triggers for an upgrade: An upgrade is unlikely as GMA's rating is constrained by GNW's weak credit profile. Fitch believes that for an issuer to attain a rating in the 'AA' category, there should be no constraint on its financial flexibility. The agency would expect the ratings on GNW's main operating subsidiaries to be no more than one to three notches lower than that on GMA before GMA would be able to attain a 'AA-' rating under the current ownership structure. Contact: Primary Analyst Wan Siew Wai Senior Director +65 6796 7217 Fitch Ratings Singapore Pte Ltd. One Raffles Quay, South Tower #22-11 Singapore 048583 Secondary Analyst Christopher Han Associate Director +65 6796 7224 Committee Chairperson Jeff Liew Senior Director +852 2263 9939 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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