Insurers' earnings are expected to remain solid during 2014 but they are still at risk from catastrophe losses and severe economic deterioration, according to Fitch Ratings.
Fitch expects to affirm the majority of its current ratings for Australian insurers in the next 12-24 months. Supporting factors are the continued strength of capitalisation and generally robust earnings. However an Australian economic downturn and persistent and high levels of natural catastrophe losses could lead to a deterioration of the sector’s credit profile.
Fitch’s expects the top-line growth rate for non-life premiums to fall closer to the 10-year average of about 4%, and the non-life sector to maintain solid earnings in 2014, subject to a more typical loss year for natural catastrophes.
The reinsurance sector’s loss ratio in the year to end-September 2013 was 45% down from 60% year-on-year, despite industry losses of $1bn from cyclone Oswald in January 2013. A solid loss experience and strong capital position should favour insurers through the 2014 renewal season. Interest rates remain low, pressuring investment returns, although the yields on government securities have recently started to rise.
Moreover, Australian insurers tend to have conservative investment portfolios; this allows headroom within the credit profile for some rebalancing towards growth assets or higher yield fixed-income assets.
Investment risk tends to be relatively low across the Australian insurance sector due to a regulatory risk-based capital framework. Fitch said there has been a modest increase− off a relatively small base − although this is not surprising given the strength of equity markets during 2012-2013. The weighting of equities is higher in the life insurance sector.
Equities as a percentage of total investments in portfolios backing shareholders’ funds and non-investment-linked statutory funds increased to 17% at end-September 2013 (end-September 2012: 15%). However, Fitch says this remains lower than the pre-global financial crisis levels of 23% at end-June 2008. It expects a conservative bias to continue, although falling yields are having a significant impact on underlying running yields of insurers and prompting some changes in allocations.