Rationale
The 'AA-' ratings on IAG's core operating companies reflect our opinion of the
group's very strong position in its key domestic markets of Australia and New
Zealand, and overall very strong risk-based capital levels, which continue to
be well protected by prudent reinsurance and reserving practices. A strong
enterprise risk-management framework in core operating entities, very strong
financial flexibility, and conservative investment and liquidity management
also support the ratings.
A significant mitigating factor to the ratings has been the group's overall
operating performance, which has been weaker than peers, particularly in
commercial business lines, and adversely impacted by natural peril events and
market volatility affecting investment returns. Poor performance from the
group's operations in the United Kingdom also has materially dampened the
group's earnings and capital base over several years, mainly due to poor
economic and industry conditions in that market.
The group announced the sale of all of its operations in the United Kingdom,
including its Equity Red Star (ERS) business for GBP87 million (subject to
regulatory approval) on Dec. 14, 2012, and Independent Commercial Brokers
(ICB), a smaller specialist commercial broking business, for GBP10 million on
Dec. 17, 2012. All assets and liabilities of the businesses will be
transferred in the sale, which is expected to be completed by the end of June
2013. However, the group will retain the existing pension fund liabilities in
relation to ERS, which can be sensitive to reserve movement owing to their
defined benefit nature.
Although we anticipate overall solid operating performance in the 2013
financial year, IAG expects to report a net loss after tax totaling A$240
million in respect of its United Kingdom operations. This includes A$160
million in 1H13 arising from loss on business disposal, loss of business
diversification, and adverse movements in the pension fund liabilities due to
revised actuarial assumptions. A further A$80 million net loss after tax is
expected in 2H13 due to recognition of a foreign-currency loss that was
previously included in reserves. These losses follow a write down of A$297
million in the 2012 financial year of all remaining goodwill and intangible
assets associated with the businesses.
Overall, we have a moderately positive view of the sale, given:
-- The group will no longer have exposure to further underwriting or
economic losses in respect of its United Kingdom businesses that were
continuing to experience ongoing industry challenges;
-- It will allow the group to focus on building profitable growth in its
Australia and New Zealand portfolios and strengthening the capabilities of its
growing Asian operations;
-- We expect the group can absorb the losses arising from the sale and
maintain insurance margin, providing weather losses and reserve releases
remain within expectations;
-- The net effect of the transactions will have a modest positive impact
on the group's regulatory capital position and minimal impact on our view of
its risk-based capital position; and
-- A lower exposure to the U.K. industry had already been factored into
our ratings
In terms of its Asian operations, the group is aiming to source 10% of its
gross written premium from the region by 2016 on a proportional basis, and is
on track to achieve this following growth in its established operations and
several small to midscale acquisitions in 2012. It now generates around 6%
from the region on a proportional basis. If the strategy to grow in Asia is
implemented effectively, the group's strong competitive position is expected
to solidify from added material regional diversity, scale, and leverage to
growth. However, in our view it poses higher risk of earnings volatility from
exposure to less-developed frameworks and reliance on effective partner
relationships and management of local market and regulatory issues as they
arise. The group to date has undertaken a relatively controlled approach to
market entry, exploring markets and potential partners over several years, and
we expect it will remain disciplined in growing these businesses and building
on their capabilities.
Outlook
The stable outlook reflects our expectation that IAG will maintain a very
strong competitive position in its key Australian and New Zealand markets,
which will drive solid underlying operating performance. We also expect the
Asian operations to continue to be largely self-funded and to overall
contribute to group profits in line with group targets in the medium to long
term. Losses from Asian operations may occur from time to time due to
unforeseen events, but we expect these can be absorbed by group profits.
The stable outlook also assumes that IAG will maintain a very strong capital
position, supported by retained earnings and wind down of substantial
outstanding claims liabilities as well as continued robust reinsurance
protection and prudent reserving practices. We expect that IAG will be able to
manage industry challenges such as higher reinsurance and claims costs through
a combination of rate increases, cost efficiencies, or changes to primary
cover or risk selection. We consider it unlikely that we would raise the
ratings on the group in the medium term. A higher rating would depend on IAG
sustaining an improvement in its overall operating performance to levels
better than peers, and/or levels of capital above its rating category as
measured by our risk-based capital model.
Related Criteria And Research
-- Group Rating Methodology And Assumptions, Nov. 9, 2011
-- Interactive Ratings Methodology, April 22, 2009
Ratings List
Ratings Affirmed
Insurance Australia Group Ltd.
Counterparty Credit Rating
Local Currency A+/Stable/--
CGU Insurance Ltd.
Swann Insurance (Aust) Pty Ltd.
Insurance Australia Ltd.
IAG Re Singapore Pte. Ltd.
IAG Re Australia Ltd.
IAG New Zealand Ltd.
Counterparty Credit Rating
Local Currency AA-/Stable/--
CGU Insurance Ltd.
Swann Insurance (Aust) Pty Ltd. (New Zealand Branch)
Swann Insurance (Aust) Pty Ltd.
Insurance Australia Ltd.
IAG Re Singapore Pte. Ltd.
IAG Re Australia Ltd.
IAG New Zealand Ltd.
CGU Insurance Ltd. (New Zealand Branch)
Financial Strength Rating
Local Currency AA-/Stable/--
IAG Re Labuan (L) Berhad
Financial Strength Rating
Local Currency A+/Stable/--
Insurance Australia Group Ltd.
Subordinated A-
Preference Stock A-
IAG Finance (New Zealand) Ltd.
Preferred Stock A-
Insurance Australia Funding 2007 Ltd.
Subordinated A+
Insurance Australia Ltd.
Subordinated A
Source: http://news.yahoo.com/text-p-afms-rtgs-insurance-aust-group-core-065802919--sector.html
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