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Fitch Affirms Westpac Lenders Mortgage Insurance at 'AA-'/Stable
June 9, 2017 / 3:03 AM / 3 months ago

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

(The following statement was released by the rating agency) SYDNEY/SINGAPORE, June 08 (Fitch) Fitch Ratings has affirmed Australia-based Westpac Lenders Mortgage Insurance Limited's (WLMI) Insurer Financial Strength Rating at 'AA-'(Very Strong). 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 DRIVERS The rating reflects Fitch's assessment of WLMI's strategic importance to the group, and includes a one- notch uplift from its standalone rating. WBC has, when required, provided capital to WLMI, and we believe the bank would do so in the future to support growth or offset the adverse impact on capitalisation from a severe deterioration in the operating environment. On a standalone basis WLMI has an adequate capital position and conservative investment approach. The company's operating and underwriting performance has historically been strong and, despite higher financial leverage compared with Fitch's median criteria guidelines, interest coverage is solid. 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 AUD7.5 billion in the year to 30 September 2016 (FY16) and had net assets of AUD58 billion at FYE16. The group's reduced risk appetite for lenders mortgage insurance (LMI) 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 has insured mortgages with loan-to-value ratios (LVR) 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 risks from mortgages with 90% and below LVR ratio through quota-share reinsurance arrangements. The transitionary arrangements have resulted in a higher regulatory capital requirement due to limitations on the amount of reinsurance allowed in the regulatory risk based calculation. To continue to meet WLMI's target capital ratios, WBC partially offset the higher capital requirement with a AUD30 million injection of equity in FY16. WLMI's coverage of its regulatory-prescribed capital decreased to an adequate 1.3x at FYE16 (FYE15: 1.5x). Financial leverage decreased to 28% at FYE16 (FYE15: 37%) due to a larger capital base. WLMI's debt consists of AUD80 million in Tier 2-compliant subordinated notes 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 14x in FY16, 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 narrow product focus as a mono-line insurer renders it susceptible to a systemic downturn in Australia's housing market. However, it has geographic diversity in its Australian exposure, helping mitigate the potential adverse effect of a regional downturn. Default rates have differed among Australian states and regions due to variations in economic stresses. The company's portfolio is weighted towards fully documented, prime borrowers. Non-standard loans accounted for 17% of risks in force at FYE16 (FYE15: 21%) and were less than 1% of risks underwritten during the year. These consist mainly of self-employed borrowers with original LTV ratios of less than 80%. RATING SENSITIVITIES There is little prospect of WLMI's rating being upgraded, as this would require an uplift from the group rating, which was affirmed in March 2017. Fitch considers WLMI's standalone rating to be below that of WBC. A downgrade of WBC's rating could lead to a downgrade of WLMI due to its reliance on WBC. A downgrade could also result 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. Contact: Primary Analyst John Birch Director +61 2 8256 0345 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney, NSW 2000 Secondary Analyst Siew Wai Wan Senior Director +65 6796 7217 Committee Chairmen Jeffery Liew Senior Director +852 2263 9939 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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