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May 8 (Reuters) - (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 reflect the company’s solid financial profile, which includes a robust standalone capital position and conservative investment approach. WLMI’s operating performance has been strong and built on the back of a historically prudent approach to underwriting and risk acceptance. Moreover, as a result of this, WLMI’s technical reserves demonstrate a strong level of surplus, which Fitch believes will support positive earnings performance.
WLMI’s risk profile continues to improve following decisions to reduce the company’s exposure. In June 2009 WLMI ceased insuring mortgages with loan/value ratios greater than 90%, and in fiscal year 2012 (FY12) the reinsurance quota share arrangement was expanded so that 60% of all new risks were ceded to a panel of highly rated reinsurers. WLMI has also been successful in reducing concentrations to both reinsurers and other counterparties.
Net profits after tax declined 28% to AUD66m in FY12 but mainly as a result of lower premium volumes. Net earned premiums were down 18% to AUD86m and will continue to decline as the level of prior period premiums exceed current levels. A higher claims expense also contributed to the lower profit result as economic weakness in the state of Queensland pushed the loss ratio up to 40%. However, at this level the portfolio remains very profitable and the rise comes off a very low base of 17% in FY11.
Through holding a geographically diverse mortgage portfolio, concentration to any one state or region is reduced. Fitch considers this to be important given periods of economic stress in Australia have historically varied considerably at a state and regional level.
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 WLMI’s ultimate parent - Westpac Banking Corporation (‘WBC’: IDR ‘AA-'/Stable) - would be willing and capable of providing such support.
There is little prospect of WLMI’s rating being upgraded, as this would require an upgrade of the group rating which was affirmed in February 2013 with a Stable Outlook.
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. However, if WBC’s ratings were to be downgraded due to weakness outside of the residential mortgage sector, this would not necessarily automatically lead to a downgrade of WLMI.