AMB Country Risk Report August 18, 2015 Our Insight, Your Advantage. Australia Country Risk Tier • The Country Risk Tier (CRT) reflects A.M. Best’s assessment of three categories of risk: Economic, Political and Financial System Risk. CRT-1 • Australia is a CRT-1 country with very low levels of economic, political and financial system risk.The Australian economy has experienced over 20 years of uninterrupted economic expansion, which includes the global financial crisis. Economic Risk Finland • Australia’s strong economic position before the global economic slowdown and the aggressive monetary and fiscal policies implemented throughout helped to make the slowdown Russia relatively mild for the country. Growth is expected to continue at a rate of 2.8% in 2015 and accelerate to 3.2% in 2016. Moderate Low Estonia High Russia Latvia Lithuania Belarus Very Low Poland Slovakia • The map below depicts Oceania, Indonesia and Papua New Guinea.A.M. Best considers Indonesia to be CRT-4 and Papua New Guinea CRT-5, while the two countries evaluated in Oceania, Australia and New Zealand, are CRT-1 and CRT-2, respectively. Kazakhstan Republic of Moldova Hungary Sakhalin Very High Ukraine Mongolia Romania a a & Serbia vina ontenegro Political Risk Russia Bulgaria Georgia Macedonia Armenia Albania Kyrgyzstan Azerbaijan Uzbekistan Turkey Greece Cyprus Turkmenistan Syria Lebanon Iraq Israel Low Kuwait ya Pakistan Bahrain Egypt Nepal Sudan Bhutan Bangladesh Myanmar India Very Low Very High Yemen Eritrea Japan High U.A.E. Oman had South Korea China Qatar Saudi Arabia Taiwan Northern Mariana Islands Hong Kong Laos Wake Island Macau Thailand Vietnam Philippines Cambodia Somalia Sri Lanka l Africa Republic Uganda Financial System Risk ia Brunei Sumatra Tanzania Moderate Malawi Comoros Zimbabwe Low East Timor Kiribati Papua New Guinea Solomon Islands Tuvalu Tokelau Somoa Coral Sea Islands High Australia Reunion Very Low Very High Lesotho Cook Islands American Samoa Fiji Mauritius Madagascar Swaziland Nauru New Guinea Vanuatu Mozambique Botswana Federated States of Micronesia Borneo Indonesia Seychelles Zambia Palau Malaysia Singapore Kenya Rwanda Dem. Republic Burundi of Congo a Marshall Islands Guam Dijbouti Ethiopia s nd la Is North Korea Tajikistan Afghanistan Moderate Iran Jordan ril Ku Tonga Niue New Caledonia Norfolk Island South Africa New Zealand For information on companies followed Market Outlooks CRT 1 2 3 4 5 Copyright © 2015 by A.M. Best Company, Inc. All rights reserved. No part of this report may be reproduced, stored in a retrieval system or transmitted in any form or by any means; electronic, mechanical, photocopying, recording or otherwise. 1 AMB Country Risk Report Australia Regional Summary: Oceania • Oceania, whose largest two nations, Australia and New Zealand, make up the vast majority of economic activity, is located in the South Pacific Ocean. Australia and New Zealand have strong political and cultural ties with the United Kingdom, enjoy high living standards and benefit from an educated population. • Australia and New Zealand have close economic ties with Southeast Asia. In 2009 the ASEAN-Australia and New Zealand Free Trade Area (AANZFTA) was established which has been successful in increasing trade throughout the region, representing over 620 million people and $4.1 trillion USD. • The region is expected to grow modestly in the coming years, with both Australia and New Zealand forecasted to grow in the range of 2.5 to 3.5% in 2015 and 2016. Growth will likely be driven by accommodative monetary policy, low inflation, currency depreciation boosting exports and weak fuel prices. Vital Statistics 2014 Nominal GDP Population GDP Per Capita Real GDP Growth Inflation Rate Premiums Written (Life) Premiums Written (Non-Life) Premiums Growth (2013 - 2014) Country Risk Tier CRT-1 CRT-4 CRT-2 CRT-3 CRT-2 CRT-1 Australia Indonesia Japan Malaysia New Zealand Singapore Source: IMF, Axco, Swiss Re and A.M. Best Economic Growth • The Australian economy is dominated by its services sector, which accounts for nearly 70% of GDP. The largest components are finance, property, and business services. 5 Real GDP CPI Inflation 4.5 4 3.5 3 % 2.5 2 1.5 1 0.5 0 • With strong institutions, a flexible economy and supportive monetary policy it is likely the commodity lead weakness will be short-lived. 1444.19 23.6 61,219 2.7 2.5 56,151 31,924 12.4 Regional Comparison Economic Risk: Very Low • Atypically slower growth of about 2.5% is expected in 2015 due to a weakened mining sector, low non-mining sector investment, and slower external demand as China cools and the eurozone remains weak. Further monetary easing is possible if the economy does not show signs of improvement. USD bn mil USD % % USD mil USD mil % 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: IMF World Economic Outlook and A.M. Best 2 AMB Country Risk Report Australia Political Risk: Very Low Political Risk Summary • Most of Australia’s population and economic activity is concentrated along the country’s eastern coast. Score 1 (best) to 5 (worst) Australia World Average International Transactions Policy 5 4 Legal System • Australia’s legal system is very strong, stable and transparent with minimal corruption.The stable regulatory environment and fair treatment of foreign investors make the country a destination for foreign direct investment. Monetary Policy 3 2 1 Regional Stability Fiscal Policy 0 Social Stability Business Environment Government Stability • Projected weaker fiscal revenues in the 2015 budget will leave an estimated AUD 52 billion shortfall.The government still hopes to reach a balanced budget by 2020 through budget initiatives, stronger tax revenues with a recovery in commodity prices and some fiscal conservatism. While not ideal, Australia does have the financial flexibility currently to run a budget deficit. Labor Flexibility Source: A.M. Best GDP Per Capita and Population for Selected Countries Financial System Risk: Very Low 300 70,000 GDP Per Capita • According to the World Bank, Australia’s business environment is ranked #10 out of 189 countries in terms of their 2015 Ease of Doing Business survey. Population 60,000 250 50,000 200 • The Australian Prudential Regulation Authority (ARPA) and the Australian Securities and Investment Commission (ASIC) are the ultimate regulatory authorities for the insurance industry in Australia. ARPA is the prudential regulator of the entire financial services industry and conforms to international standards. USD Millions 40,000 150 30,000 100 20,000 50 10,000 0 • Australian banks are sufficiently capitalized and profitable; however, under a stressed scenario, they have an outsized exposure to the housing market through mortgage lending. Australia Indonesia Source: IMF and A.M. Best Japan Malaysia New Zealand Singapore 0 • The Reserve Bank of Australia lowered the base lending rate by 50 basis points to a rate of 2% in the first half of 2015 in response to slower growth, low inflation and weaker commodity prices.There is potential for further cuts. 3 AMB Country Risk Report Australia GUIDE TO BEST’S COUnTry rISk TIErS A.M. Best defines country risk as the risk that country-specific factors could adversely affect the claims-paying ability of an insurer. Country risk is evaluated and factored into all Best’s Credit Ratings. Countries are placed into one of five tiers, ranging from “CRT-1” (Country Risk Tier 1), denoting a stable environment with the least amount of risk, to “CRT-5” (Country Risk Tier 5) for countries that pose the most risk and, therefore, the greatest challenge to an insurer’s financial stability, strength and performance. A.M. Best’s Country Risk Tiers are not credit ratings and are not directly comparable to a sovereign debt rating, which evaluates the ability and willingness of a government to service its debt obligations. Country risk Tiers Country risk Tier Definition CRT-1 Predictable and transparent legal environment, legal system and business infrastructure; sophisticated financial system regulation with deep capital markets; mature insurance industry framework. CRT-2 Predictable and transparent legal environment, legal system and business infrastructure; sufficient financial system regulation; mature insurance industry framework. CRT-3 Developing legal environment, legal system and business environment with developing capital markets; developing insurance regulatory structure. CRT-4 Relatively unpredictable and nontransparent political, legal and business environment with underdeveloped capital markets; partially to fully inadequate regulatory structure. CRT-5 Unpredictable and opaque political, legal and business environment with limited or nonexistent capital markets; low human development and social instability; nascent insurance industry. Country risk reports A.M. Best Country Risk Reports are designed to provide a brief, high-level explanation of some of the key factors that determine a country’s Country Risk Tier assignment. It is not intended to summarize A.M. Best’s opinion on any particular insurance market or the prospects for that market. Categories of risk Country Risk Reports provide scores for three categories of risk for each country. These scores are (1) Very Low; (2) Low; (3) Moderate; (4) High and (5) Very High. Category of risk Definition Economic Risk The likelihood that fundamental weaknesses in a country’s economy will cause adverse developments for an insurer. A.M. Best’s assessment of economic risk evaluates the state of the domestic economy, government finances and international transactions, as well as prospects for growth and stability. Political Risk The likelihood that government or bureaucratic inefficiencies, societal tensions, inadequate legal system or international tensions will cause adverse developments for an insurer. Political risk comprises the stability of the government and society, the effectiveness of international diplomatic relationships, the reliability and integrity of the legal system and of the business infrastructure, the efficiency of the government bureaucracy, and the appropriateness and effectiveness of the government’s economic policies. Financial System Risk Financial system risk (which includes both insurance and non-insurance financial system risk) is the risk that financial volatility may erupt due to inadequate reporting standards, weak banking system or asset markets, and/or poor regulatory structure. In addition, it includes an evaluation of whether the insurance industry’s level of development and public awareness, transparent and effective regulation and reporting standards, and sophisticated regulatory body will contribute to a volatile financial system and compromise the ability of an insurer to pay claims. Political risk Summary To provide additional detail on the political risk in a given domicile the Country Risk Reports include the Political Risk Summary. The Political Risk Summary is a radar chart that displays scores for nine different aspects of political risk scored on a scale of one to five with one being the least amount of risk and five being the highest amount of risk. Category Definition International Transactions Policy Measures the effectiveness of the exchange rate regime and currency management. Monetary Policy Measures the ability of a country to effectively implement monetary policy. Fiscal Policy Measures the ability of a country to effectively implement fiscal policy. Business Environment Measures the overall quality of the business environment and ease of doing business. Labor Flexibility Measures the flexibility of the labor market, including the company’s ability to hire and fire employees. Government Stability Measures the degree of stability in a government. Social Stability Measures the degree of social stability, including human development and political rights. Regional Stability Measures the degree of stability in the region. Legal System Measures the transparency and level of corruption in the legal system. Country risk Tier Disclosure A Country Risk Tier (CRT) is not a credit rating, rather it represents a component of A.M. Best’s Credit Rating Methodology that is applied to all insurers. A CRT is not a recommendation to purchase, hold or terminate any security, insurance policy, contract or any other financial obligation issued by a government, an insurer or other rated issuer, nor does it address the suitability of any particular policy, contract or other financial obligation for a specific purpose or purchaser. Copyright © 2015 by A.M. Best Company, Inc. Version 091714 Copyright © 2015 by A.M. Best Company, Inc. All rights reserved. No part of this report may be reproduced, stored in a retrieval system or transmitted in any form or by any means; electronic, mechanical, photocopying, recording or otherwise. 4