Fitch Ratings has affirmed the ‘AA-‘ (AA minus) Insurer Financial Strength ratings of Insurance Australia Group Limited’s main underwriting subsidiaries, Insurance Australia Limited and IAG New Zealand Limited. The outlook for the ratings is stable.
Fitch said that the affirmation reflects a good level of business diversity and scale in the group’s underwriting operations. IAG’s net profit after tax grew by 14% to AUD760 million in FY05 from AUD665m in FY04 (H106: AUD461m), although Fitch notes that IAG’s premium growth appears to be moderating in the face of more intense competitive pressure.
Currently, however, the negative affect is offset by strong underwriting and investment performance. IAG’s insurance profit – underwriting profit plus investment income from technical reserves – increased 26% to AUD1.0 billion in FY05 from AUD792m in FY04 (H106: AUD469m), while at the same time, investment income from shareholders’ funds (around 72% invested in growth assets) increased 10% to AUD479m in FY05 from AUD434m in FY04 (H106: AUD345m).
IAG’s reserving approach remains conservative, with the group reserving to a probability of sufficiency of at least 90%. Fitch notes that positive reserve development continued in FY05 and due to the tort law reforms in Australia, IAG is reserving with a greater degree of certainty, particularly for its third-party motor liability business. Based on regulatory measures, IAG is satisfactorily capitalised. Furthermore, IAG’s reinsurance programme is extensive, with more than two-thirds of counterparties being rated ‘AA’ or above.
In Australia, the operating environment is relatively stable due to tort law reforms and increased regulatory oversight, and while Fitch expects IAG to continue to focus on maximising shareholder returns, it does not foresee IAG compromising its conservative reserving approach. From a business perspective, the agency notes that the Australian market appears to offer only limited organic growth opportunities and further downward rate pressure on Australian commercial lines is likely.
While recent investments in parts of Asia offer growth potential, Fitch said it is also worth noting that IAG is investing in countries with less developed legal, reporting and governance frameworks and it does not always have a controlling interest.
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