Fitch Ratings has said its rating Outlook for the Australian and New Zealand insurance sector remains stable and the Sector Outlooks, which indicate fundamental trends, are stable too.
The agency said it believes Australian and New Zealand insurance companies are well supported by strong capital positions, conservative investment portfolios and robust earnings in a new report released today: 2016 Outlook: Australian and New Zealand Insurers.
But it said key factors that could lead to a deterioration of the sector’s credit profiles would be a severe economic downturn, and persistent and large natural catastrophe losses.
Fitch said it found a strong classification of capital levels was consistent with the results of its internal assessment of Australian and New Zealand insurers’ capital adequacy ratios, despite falling regulatory capital coverage ratios this year.
The agency also said it expected the non-life sector to strengthen earnings in 2016, subject to a more benign level of natural catastrophe losses than in 2015.
“Better underwriting margins should be complemented by improved investment yields but competition is affecting premium rates,” the report said.
Fitch was also forecasting Australia and New Zealand to report GDP growth of 2.3% for FY 2015, and 2.7% and 2.5% respectively in 2016.
However, household budgets constrained by high financial leverage may weaken demand for insurance, it warned.
It said the sector outlook could be revised to Negative from Stable if the economy was to experience a severe downturn which could in turn weaken group credit profiles and lower surplus capital.
This was due to Australian and New Zealand insurers often being part of larger financial institutions with significant banking exposures.
“Larger and more frequent extreme natural catastrophes could also pose a threat to Outlooks.
“Initially this might only impact earnings, but a sustained increase in the frequency of events could reduce available reinsurance capacity, and lead to higher net retentions and exposures.”
However, Fitch said strong and sustained earnings without a weakening of other credit metrics could trigger a revision of Outlooks to positive, on the other hand.
