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Fitch upgrades Suncorp outlook

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Fitch Ratings has raised its outlook for Suncorp Group on expectations that it will be able to manage claims losses from the flooding catastrophe in NSW and Queensland as well as virus-related business interruption (BI) claims.

The revision takes Suncorp’s long-term issuer default rating (IDR) to stable from negative. The IDR and Insurer Financial Strength of Suncorp’s Australian non-life operating entity AAI has also been upgraded to stable from negative.

Fitch says AAI, historically the group’s biggest profit contributor, generated 84% of Suncorp’s non-life premiums and 68% of overall profit in the last financial year.

It says the group should be “protected from catastrophe losses” including the current flooding disaster in NSW and southeast Queensland.

“Catastrophe losses in [the December half] did not trigger reinsurance recoveries and continued to erode aggregate deductibles on reinsurance treaties,” Fitch said. “The maximum first-event retention under [the group’s] main catastrophe programme is $250 million, with an upper limit of $6.5 billion.”

Fitch says the underwriting performance has been supported by a strong reinsurance program, but acknowledges the insurer has been continually increasing its allowance for natural hazards due to the higher frequency of extreme weather events and rising reinsurance costs.

The allowance for this financial year has been raised to $950 million, from $820 million, it says.

Fitch says the group could see higher COVID-19 related BI claims, but thinks the “risk is manageable given the insurer's reserving strength and sound capital buffers”.

Suncorp has moved to increase its provision for COVID BI claims to $214 million from $195 million.

“There is still some uncertainty around the ultimate cost of BI claims, but [the group’s] overall outstanding claims liability includes risk margins to achieve a 90% probability of adequacy, a level similar to previous years,” Fitch said.

“We expect [Suncorp Group’s] profitability and capital metrics to stay within the tolerances of its rating level.

“Our expectations for [the group] are more favourable than the pro forma results implied by our 2020 COVID-19 stress test analysis, which was the basis for the prior negative outlook.”

Suncorp has about a 20% share of the non-life market in Australia when measured on a net earned premium basis, Fitch says.