Fitch Ratings has announced its first-time ‘BBB’ rating for ClearView Wealth to reflect its poor recovery prospects in the event of a default.
ClearView's ratings reflect the insurer's 'less favourable' business profile, 'very strong' capitalisation and leverage and 'good' financial performance and earnings, the rating agency said.
Further to that, the sub-ordinated securities represented ClearView's direct, unsecured and sub-ordinated obligations, and were rated two notches below ClearView's IDR (Issuer Default Rating) to reflect Fitch's assumption of poor recovery prospects in the event of a default, given the level of subordination, and Fitch's assessment of Australia's regulatory environment as following a Group Solvency approach.
“We assess ClearView's business profile as 'Less Favourable' relative to that of Australian insurers, reflecting its 'Less Favourable' business risk profile, and moderate competitive positioning and diversification. As a result, we score ClearView's business profile at 'bbb' under our credit-factor scoring guidelines,” Fitch said.
According to the agency, the business risk profile was assessed as 'less favourable' due to the susceptibility of ClearView's products and distribution channels to regulatory intervention, similar to other life insurers in Australia.
Also, scrutiny of the sector had been high, including the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which identified conduct failings and behaviour that were below expectations.
“The commission made recommendations to insurers and concluded that the industry's regulation should be brought into line with that of other financial products, which would better balance the rights and obligations of insurers and the insured. As a result, ClearView, along with the other insurers, is making changes to products as well as distribution strategies,” the firm explained.
The agency also stressed that ClearView distributed its products mostly via independent financial advisers (IFAs) and group strategy was to build strong relationships with them to increase cross-selling opportunities between life and wealth products and its competitive position is supported by increased access to IFAs' product lists.
“We regard ClearView's financial performance as 'Good' in light of expected improvement in new business margins as the insurer reprices and moves to more profitable products. Net profit fell to $4 million in FY19 from $27 million in FY18 due to stronger claims and lapse assumptions as well as one-off items. Return on assets and equity averaged 1.7% and 3.4%, respectively, in the last three years.”
The agency also announced it had developed updated base case assumptions to support a review of the insurance companies it rates due to the significant uncertainties created by the onset of the global COVID-19 pandemic and would place ratings on Rating Watch Negative or downgrade ratings.
ClearView would be part of this review and its downgrade rating sensitivities would include:
- Deterioration in the business profile, including weaker business franchise and distribution capabilities
- Weaker financial performance with a return on equity sustained below 3%; or
- Regulatory PCA coverage falling below 1.5x on a sustained basis