Fitch Ratings has updated its outlook on both Suncorp Group Limited (SGL) and SGL subsidiary AAI Limited to negative.
Specifically, SGL’s Long-Term Issuer Default Rating (IDR) and AAI’s IDR and Insurer Financial Strength (IFS) Rating were changed to “Negative” from “Stable.”
However, Fitch affirmed SGL’s Long-Term IDR at “A+,” Short-Term IDR at “F1” and subordinated debt at “A-”. Similarly, AAI’s IDR was affirmed at “A+,” IFS Rating at “AA-” and subordinated debt at “A”.
In a release, Fitch explained that the review considered the ratings firm’s current assessment of the impact of the COVID-19 outbreak – including the pandemic’s effect on the economy – under a set of ratings assumptions related to interest-rate levels. Fitch also took into consideration declines in the market values of stocks, bonds, derivatives and other capital market instruments; market liquidity; and the sheer scale of coronavirus-related claim/benefit exposures.
The “negative” outlook points toward “uncertainty and increased risk to capital and earnings due to the COVID-19 pandemic,” a release said. SGL’s group-wide capitalization was “Very Strong” (as measured by Fitch’s Prism Factor-Based Capital Model) at the financial year ending June 30, 2019. However, it could decline to “Strong” under Fitch’s pro forma capital analysis. Fitch noted that the impact of the financial market disruption to SGL was slightly mitigated due to the low non-life risky assets ratio (7% at end-2019).
Fitch’s lowered outlook also reflects the potential earnings pressure from both weaker bank performance and insurance business performance. Insurers like SGL are facing lower premium growth and the inability to pass rate hikes due to weaker economic conditions – which could only worsen if the pandemic’s severity and duration increases.
In spite of everything, Fitch believes that SGL’s potential exposure to COVID-19-related underwriting losses is “manageable,” thanks to the modest share of business lines which are directly vulnerable to the outbreak, as well as pandemic exclusions in their policies.
SGL’s business profile has also been ranked as “Favourable” (aa-) against other Australian non-life insurers due to its ‘Most Favourable’ competitive positioning, and “Favourable” business risk profile and diversification.
