Overview

• Suncorp group's business diversity has supported the realization of consistently strong operating performance comparable with global peers rated at the 'AA-' level.
• The group has also maintained excellent capital adequacy and well-structured risk management.
• We are therefore raising our ratings on Suncorp to 'A+' from 'A', and the ratings on its core operating entities to 'AA-' from 'A+'. We are also raising the short-term issuer rating on Suncorp-Metway Ltd. to 'A-1+' from 'A-1'.
• The outlook is stable because we expect Suncorp to maintain its very strong market position and consistently sound earnings, while retaining excellent capital adequacy.

Rating Action

On Dec. 15, 2021, S&P Global Ratings raised its long-term issuer credit rating on Suncorp Group Ltd. to 'A+' from 'A'. We also raised the issuer credit and financial strength ratings on its core operating entities to 'AA-' from 'A+', and the short-term issuer rating on Suncorp-Metway Ltd. to 'A-1+' from 'A-1'. The outlook on all ratings is stable.

At the same time, we raised our long-term rating on Suncorp's A$600 million subordinated notes due in 2028 to 'A-' from 'BBB+'. We raised the long-term rating on its A$250 million subordinated notes due in 2035 to 'BBB+' from 'BBB'.

We also raised our long-term rating on core operating entity AAI Ltd.'s subordinated notes to 'A-' from 'BBB+'.

Rationale

We raised the ratings on Suncorp Group Ltd. because we expect it to consistently achieve strong operating performance--particularly in its property/casualty (P/C) businesses. The group's earnings have displayed resilience over the past two years, withstanding COVID-19 pandemic impacts and rising weather-related claims. The performance of its P/C businesses has shown less volatility than both local and international peers, and we expect this to continue. This demonstration of consistent group earnings resulted in our removal of the negative comparable ratings analysis modifier. Over the past five years, Suncorp's P/C operations' average return on revenue was 11.7% and average net combined ratio was 93.7%, both of which compare favorably with international peers rated at the 'AA-' category.

We expect Suncorp to maintain excellent capital adequacy and modest gearing over our forecast period. The group had capital above the 'AAA' confidence level under our insurance capital model as of June 30, 2021, with strong levels of excess capital held at the holding company. At the same time, Suncorp had relatively low levels of leverage, at about 15%, with fixed interest coverage of 25x.

We rate the group's nonoperating holding company, Suncorp Group Ltd., one notch below the group credit profile at 'A+', rather than the standard two notches lower. This reflects the access to diverse cash flows across the group and, to a lesser extent, its holding of surplus capital that collectively supports its debt servicing capability.

We raised the ratings on the subordinated notes issued by Suncorp and AAI Ltd. by one notch each, as these ratings are reflective of the holding company rating and rating on AAI Ltd., respectively.

We expect Suncorp would provide timely financial support to Suncorp-Metway Ltd. (SML) in all foreseeable circumstances. Consequently, we equalize our issuer credit rating on the bank with our issuer credit rating on Suncorp.

In our view, the stand-alone creditworthiness of the bank remains unchanged following a revision to our criteria for rating banks and nonbank financial institutions and for determining a Banking Industry Country Risk Assessment (BICRA) (see "Financial Institutions Ratings Methodology," published Dec. 9, 2021, and "Banking Industry Country Risk Assessment Methodology And Assumptions," published Dec. 9, 2021). The issuer credit rating on SML now reflects four notches of support above the stand-alone credit profile (SACP) of 'bbb+'.

Outlook

SUNCORP

The stable outlook on Suncorp and its core operating subsidiaries reflects our expectation that the group will maintain a very strong business and financial position over the next 12-24 months, underpinned by sound operating performance and excellent capital adequacy.

Downside scenario

We may lower the ratings on Suncorp core subsidiaries over the next 12-24 months if:

• We assess the competitive position of the P/C businesses as weaker, potentially due to poor underwriting or risk selection; or
• Our view of the group's prospective capital adequacy position weakens.

We may also lower the ratings on the nonoperating holding company, Suncorp Group Ltd., if the group's diversity of operations reduced and we were to widen the notching between the operating companies and holding company to two notches.

Upside scenario

We consider a higher rating on Suncorp as unlikely over the next 12-24 months, recognizing the extent of the inherent business diversification.

SUNCORP-METWAY LTD.

The stable outlook on SML mirrors that on the core operating entities of Suncorp, reflecting our view that the bank is an integral part of the broader group and our expectation that Suncorp will support SML in all foreseeable circumstances. As such we continue to equalize our ratings on the bank to our view of Suncorp's creditworthiness.

Alternative scenario: We see a one-in-three possibility that Australian banks will face reduced industry risks in the next two years. If that occurs, we expect to revise our assessment of SML's SACP to 'a-' from 'bbb+'. Nevertheless, we expect to keep our ratings on SML unchanged in this scenario by reducing the uplift in our issuer credit ratings above the bank's SACP to three notches from four notches.

Downside scenario

We would lower our rating on SML if we formed a view that the overall creditworthiness of Suncorp has weakened or if the likelihood of extraordinary support from the group diminished.

Upside scenario

We expect to raise our ratings on SML if we raise our ratings on Suncorp's core operating entities.

Ratings Score Snapshot

Ratings Score Snapshot: Suncorp-Metway Ltd.

Issuer Credit Rating: AA-/Stable/A-1+

Stand-alone credit profile: bbb+

• Anchor: bbb+
• Business Position: Adequate (0)
• Capital and Earnings: Strong (+1)
• Risk Position: Adequate (0)
• Funding and Liquidity: Moderate and adequate (-1)
• Comparable Rating Analysis: 0

Support: +4

• ALAC Support: 0
• GRE Support: 0
• Group Support: +4
• Sovereign Support: 0

Additional Factors:0

Related Criteria

• Criteria | Financial Institutions | General: Financial Institutions Rating Methodology, Dec. 9, 2021
• Criteria | Financial Institutions | Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Dec. 9, 2021
• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• General Criteria: Group Rating Methodology, July 1, 2019
• General Criteria: Hybrid Capital: Methodology And Assumptions, July 1, 2019
• Criteria | Insurance | General: Insurers Rating Methodology, July 1, 2019
• Criteria | Financial Institutions | General: Risk-Adjusted Capital Framework Methodology, July 20, 2017
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
• Criteria | Insurance | General: Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010

Ratings List