(The following statement was released by the rating agency) Fitch Ratings-Sydney/Singapore-March 19: Fitch Ratings has assigned Australia-based ClearView Wealth Limited (ClearView) a Long-Term Issuer Default Rating (IDR) of 'BBB' and its proposed subordinated debt a long-term rating of 'BB+(EXP)'. At the same time, Fitch has assigned ClearView's operating subsidiary, ClearView Life Assurance Limited, an Insurer Financial Strength Rating of 'BBB+' (Good) and a Long-Term IDR of 'BBB'. The Outlooks are Stable. The subordinated securities represent ClearView's direct, unsecured and subordinated obligations, and are rated two notches below ClearView's IDR to reflect Fitch's assumption of poor recovery prospects in the event of a default, given the level of subordination, and Fitch's assessment of Australia's regulatory environment as following a Group Solvency approach. Fitch did not apply any notching for non-performance risk, which we believe is minimal under our criteria. The securities have a maturity period of 10 years, and are callable after five years. The notes would be written off or converted to equity in part or in full should the Australian Prudential (LON:PRU) Regulation Authority (APRA) deem that ClearView has become non-viable without conversion or a public-sector capital injection. Fitch thinks APRA is unlikely to activate the non-viability trigger unless the event is sustained and leads to ClearView's non-viability. Net proceeds from the issue will be used to support capitalisation of the life insurance operations and pay off its outstanding credit facility. The final rating is contingent upon the receipt of final documents conforming to information already received. Key Rating Drivers ClearView's ratings reflect the insurer's 'Less Favourable' business profile, 'Very Strong' capitalisation and leverage and 'Good' financial performance and earnings. ClearView is a non-operating holding company with ClearView Life Assurance - a regulated life insurer - as its main operating subsidiary. We assess ClearView's business profile as 'Less Favourable' relative to that of Australian insurers, reflecting its 'Less Favourable' business risk profile, and moderate competitive positioning and diversification. As a result, we score ClearView's business profile at 'bbb' under our credit-factor scoring guidelines. The insurer had total assets and equity of AUD2.4 billion and AUD0.4 billion at end-2019 (1HFY20), respectively, and an insurance sector asset share of 0.6% at FYE19. Its product mix is broadly similar to that of the industry's retail life segment. We assess the business risk profile as 'Less Favourable' in light of the susceptibility of ClearView's products and distribution channels to regulatory intervention, similar to other life insurers in Australia. Scrutiny of the sector has been high, including the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which identified conduct failings and behaviour that were below community expectations. The commission made recommendations to insurers and concluded that the industry's regulation should be brought into line with that of other financial products, which would better balance the rights and obligations of insurers and the insured. As a result, ClearView, along with the other insurers, is making changes to products as well as distribution strategies. ClearView distributes its products mostly via independent financial advisers (IFAs) and group strategy is to build strong relationships with them to increase cross-selling opportunities between life and wealth products. Its competitive position is supported by increased access to IFAs' product lists. ClearView stopped participating in direct business in FY17 and has completed remediating this book. We regard ClearView's financial performance as 'Good' in light of expected improvement in new business margins as the insurer reprices and moves to more profitable products. Net profit fell to AUD4 million in FY19 from AUD27 million in FY18 due to stronger claims and lapse assumptions as well as one-off items. Return on assets and equity averaged 1.7% and 3.4%, respectively, in the last three years. The life sector has been highly competitive with weak returns, especially in individual disability income insurance (IDII), with APRA intervening in December 2019 to ensure sustainability. ClearView is redesigning and repricing its IDII portfolio to meet the regulator's recommendations. The ability to pass on rising prices to customers will also depend on competitor behaviour, which is likely to be shaped by regulatory capital charges, which may increase with inaction. ClearView transfers a material share of its life risk to reinsurers, and this has helped ease its earnings volatility and maintain profitability, while the industry posted losses in IDII. ClearView's asset growth in recent years has been high relative to the industry. Fitch believes faster growth may lead to pressure on earnings, especially during periods when competitive pricing intensifies, although ClearView's overall profitability has been better than that of the industry in the past few years. Fitch regards ClearView's capitalisation and leverage as 'Very Strong'. Its Prism Factor-Based Model (FBM) score was 'Extremely Strong' based on FY19 results, reflecting its product mix and low investment risks. Total enterprise capital fell slightly below internal benchmarks, but we expect it to improve with the proposed subordinated issuance. We will treat the issuance as 100% debt in the financial leverage ratio (FYE19: 3%), which we expect will stay low for the current rating following the proposed debt issuance. ClearView, similar to other life insurers with exposure to IDII, will also face an additional pillar 2 capital charge. Coverage of the regulatory prescribed capital amount (PCA) dropped to 2.3x by 1HFYE20 and 2.4x at FYE19 from 4.0x at FYE18. The drop was due to a loss of tax credits and inadmissible reinsurance receivables. A successful debt issuance should diversify its funding sources and improve financial flexibility, moving it away from its past focus on equity funding. We regard ClearView's investment and asset risks as 'Very Strong'. A vast majority of its invested assets are in unit trusts, backing unit-linked policies where investment performance is passed through to policyholders. Assets under ClearView's own risks are invested in high quality deposits and cash, resulting in a zero risky assets ratio. Its unitised capital-guaranteed funds, which provide a guarantee that the unit price cannot fall, are backed by high quality liquid funds. RATING SENSITIVITIES Downgrade Rating Sensitivities: Fitch is developing updated base case assumptions to support a review of the insurance companies it rates, focused on the significant uncertainties created by the onset of the global COVID-19 pandemic. Assumptions will be put in place for interest rate levels; declines in the market values of stocks, bonds, derivatives and other capital market instruments typically owned/traded by insurance companies; market liquidity; and the magnitude of COVID-19-related claim/benefit exposures. Fitch plans to conduct pro-forma analysis for individual companies to reflect these assumptions, and compare the pro-forma results to current rating sensitivities. Fitch expects to place ratings on Rating Watch Negative or downgrade ratings, if sensitivities are notably breached. ClearView will be part of this review and its downgrade rating sensitivities include: - Deterioration in the business profile, including weaker business franchise and distribution capabilities - Weaker financial performance with a return on equity sustained below 3%; or - Regulatory PCA coverage falling below 1.5x on a sustained basis Upgrade Rating Sensitivities: - Stronger business profile, including successful redesign and repricing of the IDII portfolio; and - Stronger financial performance with a return on equity sustained above 6%; and - Prism FBM score maintained above 'Very Strong' along with successful diversification of funding sources ESG CONSIDERATIONS ESG issues are credit neutral or have only a minimal credit impact on the entities, either due to their nature or the way in which they are being managed by the entities. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. ClearView Life Assurance Limited; Long Term Issuer Default Rating; New Rating; BBB; RO:Sta ; Insurer Financial Strength; New Rating; BBB+; RO:Sta ClearView Wealth Limited; Long Term Issuer Default Rating; New Rating; BBB; RO:Sta ----subordinated; Long Term Rating; Expected Rating; BB+(EXP) Contacts: Primary Rating Analyst Kanishka de Silva, CFA Associate Director +61 2 8256 0367 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Secondary Rating Analyst Siew Wai Wan, Senior Director +65 6796 7217 Committee Chairperson Jeffrey Liew, Senior Director +852 2263 9939
Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Criteria (pub. 02 Mar 2020) https://www.fitchratings.com/site/re/10112692 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10114546 Solicitation Status https://www.fitchratings.com/site/pr/10114546#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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