Fitch Affirms Westpac Lenders Mortgage Insurance at 'AA-'/Stable

(The following statement was released by the rating agency)SYDNEY, October 25 (Fitch) 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 DRIVERSThe IFS rating and Stable Outlook of WLMI is driven by the credit profile of its ultimate parent, Westpac Banking Corporation ('WBC'; IDR 'AA-'/Stable), and reflects Fitch's assessment of its strategic importance to the group. The rating also reflects the company's solid financial profile, which includes a robust standalone capital position and conservative investment approach. WLMI's operating and underwriting performance has historically been strong and interest coverage is sound.Reliance on WBC for financial flexibility increased with the introduction of financial leverage into WLMI and Fitch believes the group to be capable of providing support if ever required. WBC generated a net income of AUD3.6bn over the six months to 31 March 2015 (1H15) and had net assets of AUD50bn. The group has maintained its reduced risk appetite for lenders mortgage insurance risk, and WLMI uses reinsurance to significantly limit its net exposure. As a result of a reduced risk appetite and the run-off of policies written in prior periods, the company continues to generate significant levels of surplus capital. WBC repatriated AUD179m of WLMIs ordinary equity through a share buy-back in addition to AUD25m in dividends in FY14. Despite this, WLMI's coverage of its regulatory prescribed capital amount increased to a strong 1.41x at FYE14 (FYE13: 1.25x). Part of the capital initiatives conducted during FY14 included the AUD80m issuance of Tier 2 compliant subordinated notes from WLMI to WBC. Fitch employs a regulatory override for compliant securities in Australia and gives these 100% equity credit in its internal assessment of capital adequacy. However, the agency treats these hybrids as 100% debt in the financial leverage calculation. As a result, WLMI's financial leverage increased to 34% at FYE14 which is higher than the agency's median criteria guidelines for a 'AA' rated insurer, and increases the company's reliance on WBC. In Fitch's opinion, WLMI would have sufficient capital to withstand a range of severe downturn scenarios, although in a more severe scenario WLMI would most likely require recapitalisation to continue to operate within prudential guidelines. In such a scenario, the agency believes WBC would be willing and capable of providing such support. WLMI's investment portfolio is low-risk, consisting of either cash or highly rated fixed-income securities. Securities in its portfolio were restricted to those from domestic 'AA' rated financial institutions at FYE14. The company does not have any exposure to 'risky' investment assets such as equities or below investment grade securities. RATING SENSITIVITIESThere is little prospect of WLMI's rating being upgraded as this would require an uplift from the group rating which was affirmed in May 2015.The key rating driver that could lead to a downgrade of WLMI is a downgrade of WBC's ratings given its increased reliance on WBC.A severely deteriorating economic environment that ultimately leads to a weakening of WLMI's capital position, could lead to a downgrade in the unlikely event that capital support were not forthcoming from WBC. In such a scenario WLMI may find itself unable to meet high minimum regulatory capital requirements.Contact: Analysts John BirchDirector+61 2 8256 0345Fitch Australia Pty Ltd, Level 1577 King Street, Sydney, NSW 2000Secondary AnalystSiew Wai WanSenior Director+65 6796 7217Committee Chairmen Jeff LiewSenior Director+852 2263 9939Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0304, Email: leni.vu@fitchratings.com.Additional information is available on www.fitchratings.comApplicable Criteria Insurance Rating Methodology (pub. 16 Sep 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=992806Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992806Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det ail=31ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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