Australian P/C Insurers Credit Quality Remains Strong Says S&P

September 6, 2005

Standard & Poor’s Ratings Services has issued a statement indicating that “credit quality among the nonlife insurance players in Australia should remain strong over the next couple of years, supported by insurers’ strong profitability in the latest round of reporting results for the period to June 30, 2005, and by the maintenance of solid balance-sheet strength.”

“The outlook for profitability in the coming 12 to 18 months is strong, despite many insurers flagging a likely tempering in insurance margins,” commented S&P credit analyst Kate Thomson, Financial Services Ratings group. S&P also noted that “underwriting profitability should remain solid, with an industry combined ratio of less than 95 percent.”

The rating agency indicated, however that it does not expect the industry to achieve the same levels of very strong it has had in previous years. “Insurers’ profitability, which is not immune from the negative influences currently in the market, will moderate as the very strong premium rate increases achieved in recent years (2001-2003) retreat further in 2006,” Thomson continued. “Levels of financial strength are expected to remain robust, and balance-sheet strength to remain high, supported by robust levels of probability of adequacy for claims reserves, and the maintenance of strong capital positions to buffer against unexpected loss.”

S&P noted: “Profitability was very strong for the Australian nonlife insurers in the period to June 30, 2005, despite difficulties brought by increased storm activity in the eastern parts of Australia, and rate reductions for corporate and commercial lines. Insurance Australia Group Ltd. (IAG; core operating entities rated ‘AA’), QBE Insurance Group Ltd. (QBE; core operating entities rated ‘A+’), Promina Group Ltd. (core operating entities rated ‘A+’), Wesfarmers Ltd. (core operating insurance entities rated ‘A-‘), and Suncorp-Metway Ltd. (core operating entities rated ‘A’) all reported strong nonlife insurance results in the latest period, with historic low combined ratios in the range of 86 percent-95 percent.

“Key insurance themes reported by the major insurers include the increased cost arising from storm activity, material premium rate reductions for large corporate risks flowing into the commercial sector, good claims experience for personal injury related claims, and the maintenance of profitable premium rates (as well as terms and conditions) despite a softening market. Storm activity continues globally, and, while QBE’s exposure to the cost of Hurricane Katrina in the U.S. is expected to be manageable, the insured cost to the global insurance industry will be large.”

“The outlook for premium income over the next two years remains mixed across the major insurance groups, with some expecting relatively flat premium income levels, while others expect a continuation of reasonable growth,” Thomson added. S&P said it “believes that all insurers will report lower levels of premium income growth in the next few years than the historical high levels achieved in 2001 to 2003 as commercial rates reduce and competition heightens for personal lines business.”

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