(The following statement was released by the rating agency)SYDNEY/SINGAPORE, June 24 (Fitch) Fitch Ratings has affirmed Australia-based Westpac Lenders Mortgage Insurance Limited's (WLMI) Insurer Financial Strength Rating at 'AA-'. The Outlook is Stable due to WLMI's solid financial profile and the unchanged credit profile of its ultimate parent, Westpac Banking Corporation (WBC; 'AA-'/Stable).
KEY RATING DRIVERSThe rating reflects Fitch's assessment of WLMI's strategic importance to the group, a robust standalone capital position and conservative investment approach. The company's operating and underwriting performance has historically been strong and, despite high financial leverage compared with Fitch's median criteria guidelines, interest coverage is sound.The introduction of financial leverage into WLMI increased its reliance on WBC for financial flexibility. Fitch believes the group can provide support if required. WBC generated net income of AUD8.1bn over the year to 30 September 2015 (FY15) and had net assets of AUD54bn.
The group's reduced risk appetite for lenders mortgage insurance (LMI) risk is unchanged from FY14. WLMI continues to use reinsurance to significantly limit its net exposure. However, the strategic alliance with insurer Arch Capital Group, Ltd. has increased WLMI's oversight over all residential mortgages originated in WBC that require LMI and improved the alignment of banking and LMI product systems. WLMI insures mortgages with loan/value (LTV) ratios of more than 90% since May 2015, but cedes 100% of the exposure through reinsurance under transitionary arrangements. WLMI also ceded a large proportion of its 90% and below LTV ratio risks through quota-share reinsurance arrangements.
The company continues to generate significant surplus capital due to a reduced risk appetite and the run-off of previously written policies. WBC repatriated AUD25m of WLMIs ordinary equity through a share buy-back in addition to AUD18m in dividends in FY15. Despite this, WLMI's coverage of its regulatory-prescribed capital increased to a strong 1.5x at FYE15 (FYE14: 1.4x). Financial leverage increased to 37% in FYE15 (FYE14: 34%) due to reduced equity and AUD80m of Tier 2-compliant subordinated notes WLMI issued to WBC. This is higher than the agency's median criteria guidelines for 'AA' rated insurers and increases the company's reliance on WBC. However, strong profitability resulted in an interest coverage ratio of 9x in FY15, which is consistent with Fitch's median criteria guidelines for the rating.
In Fitch's opinion, WLMI has sufficient capital to withstand a range of severe downturn scenarios, although in a more severe scenario WLMI would be likely to require recapitalisation to continue operating within prudential guidelines. In such a scenario, the agency believes WBC would be willing and capable of providing support. WLMI has a low-risk investment portfolio that consists of cash and highly rated fixed-income securities, which are restricted to those from domestic 'AA'-rated financial institutions. The company is not exposed to risky assets, such as equities or below-investment-grade securities.WLMI's geographically diverse mortgage portfolio and tighter underwriting standards and risk acceptance helped limit the effect on earnings due to economic weakness in parts of Queensland. Loans originated during 2008 and 2009 in Queensland dominated new mortgages in possessions during FY15 and Fitch considers risk-mitigation through geographic diversification important, as periods of economic stress in Australia have historically varied considerably at state and regional levels.
The company's portfolio is weighted to fully documented, prime borrowers. Non-standard loans accounted for 21% of risks in force at FYE15 (FYE14: 22%) and only 3% of risks underwritten during the year. These consist mainly of self-employed borrowers with original LTV ratios of less than 80%. 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 2016. Fitch considers WLMI's standalone rating to be below WBC. A downgrade of WBC's rating is the key rating driver that could lead to a downgrade of WLMI due to its reliance on WBC.
A downgrade could also be made if a severely deteriorating economic environment leads to a weakening of WLMI's capital position and capital support was not forthcoming from WBC. In such a scenario, WLMI may find itself unable to meet high minimum regulatory capital requirements.
Analysts John BirchDirector+61 2 8256 0345Fitch Australia Pty LtdLevel 15, 77 King Street, Sydney, NSW 2000Secondary AnalystSiew Wai WanSenior Director+65 6796 7217Committee Chairmen Federico FaccioSenior Director+44 20 3530 1394Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com.Additional information is available on www.fitchratings.comApplicable Criteria Insurance Rating Methodology (pub. 17 May 2016)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881564Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=1007951Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1007951Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det ail=31ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.