Fitch: Australian and NZ Insurance Outlooks Remain Stable

Fitch Ratings' says in a new report released today, that its rating Outlook for the Australian and New Zealand insurance sector remains Stable. The Sector Outlooks - an indicator of fundamental trends, are also Stable. The agency believes Australian and New Zealand insurance companies are well supported by strong capital positions, conservative investment portfolios and robust earnings. Key factors that could lead to a deterioration of the Sector's credit profiles would be a severe economic downturn, and persistent and large natural catastrophe losses.

Despite falling regulatory capital coverage ratios in 2015, Fitch finds that a strong classification of capital levels is consistent with the results of its internal assessment of Australian and New Zealand insurers' capital adequacy ratios. As a result of the Australian Prudential Regulation Authority's rigorous risk-based capital regime and definitions of capital, Fitch can apply a regulatory override and assign 100% equity credit in its assessment of capital adequacy for any hybrid instrument that receives regulatory approval.

The investment portfolios of Australian insurers remain conservatively positioned and dominated by highly rated fixed-income securities. This provides some scope for reallocation to growth assets and higher yielding fixed-income securities without compromising credit profiles. Insurers have increasing credit risk in their fixed-income portfolios and are increasing their exposure to growth assets to improve investment yields, but these changes have been minor due to the higher capital charges involved.

Fitch expects the non-life sector to strengthen earnings in 2016, subject to a more benign level of natural catastrophe losses than in 2015. Better underwriting margins should be complemented by improved investment yields but competition is affecting premium rates. Improved investment earnings and a stabilisation of adverse lapse and claims rates should support earnings in the life sector.

Australia's economic performance has weakened but remains robust compared with other developed countries. Fitch is forecasting Australia and New Zealand to report GDP growth of 2.3% for full-year 2015, and 2.7% and 2.5%, respectively in 2016. However, household budgets constrained by high financial leverage may weaken demand for insurance.

The Stable Sector Outlook reflects Fitch's expectation that the market will be supported by Australia and New Zealand's economic performance. Australian and New Zealand insurers are often part of larger financial institutions with significant banking exposures. The Outlooks could be revised to Negative if the economy was to experience a severe downturn, which in turn weakened group credit profiles and lowered surplus capital within the insurance operations.

Larger and more frequent extreme natural catastrophes could also pose a threat to Outlooks. Initially this might only impact earnings, but a sustained increase in the frequency of events could reduce available reinsurance capacity, and lead to higher net retentions and exposures.

Strong and sustained earnings without a weakening of other credit metrics could trigger a revision of Outlooks to positive.