Insurance Australia Group Affirmed At #A#; Core Operating Subs Affirmed At #AA-#; Outlooks Stable

Stocks and Financial Services Press Releases Friday December 15, 2017 08:56
MELBOURNE--15 Dec--S&P Global Ratings

MELBOURNE (S&P Global Ratings) Dec. 15, 2017--S&P Global Ratings today said it has affirmed its 'A' issuer credit rating on insurance group holding company Insurance Australia Group Ltd. (IAG). We also affirmed our 'AA-' financial strength and issuer credit ratings on IAG's core operating subsidiaries. The outlook on all the ratings remains stable. The core operating subsidiaries of IAG include non-life insurers Insurance Australia Ltd. (IAL) and IAG New Zealand Ltd. (IAGNZ); and captive reinsurers IAG Re Singapore Pte. Ltd., and IAG Re Labuan (L) Berhad.

The affirmations reflect our view that, although the agreements will lead to a material increase in IAG's reinsurance utilization, they will not result in a dilution of the insurer's earnings base or control over its business above the extent we anticipate in the 'AA-' ratings.

The agreements--with reinsurers Munich Re, Swiss Re, and Hannover Re--are on a whole-of-account basis, and will provide unlimited cover for IAG's consolidated businesses in Australia, New Zealand, and Thailand for an average initial period of more than five years.

The agreements will operate in addition to IAG's existing quota share arrangements, including: 20% whole of account quota share with Berkshire Hathaway for 10 years from July 1, 2015, and 30% compulsory third party quota share with Munich Re for four years from July 1, 2016, (with IAG having an option to extend for a further two years).

The stable outlook reflects our expectation that IAG's competitive position and capital adequacy will remain very strong to the end of our forecast period to June 30, 2020. We assume the company will successfully implement an optimization program with no adverse impact on retention levels. While there is some flexibility for maintaining its 'AA-' rating under a weakening financial risk profile, our rating does factor in IAG maintaining its very strong capital adequacy. We also expect IAG will broadly maintain the quality, structure, and extent of its reinsurance arrangements over the medium term.

We could raise our ratings in the event that the group strengthened its capital adequacy and maintained it at an extremely strong level. We could also consider an upgrade should IAG's operating performance improve materially such that it is likely to consistently and significantly outperform peers.

We may lower the ratings on the group if, contrary to our expectations:
  • Its competitive position were to deteriorate substantially, which could occur if its operating performance weakened on a sustained basis relative to peers or it was no longer able to maintain its positive brand differentiation or strong market position.
  • Its capital adequacy in our insurance capital model were to weaken significantly for a prolonged period. This could result from aggressive capital returns, material reduction in earnings or reinsurance cover, or a higher risk investment or business profile.
  • We see potential for additional volatility in the group's capital and earnings position from year to year, which could arise from ongoing, elevated losses from medium-term weather-related events or unexpected shocks in claim costs, investment returns, and inflation.

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