July 17, 2013 / 7:33 AM / 4 years ago

RPT-Fitch Affirms Australia's QBE at 'A'/'A+'; Outlook Stable

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July 17 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed QBE Insurance Group Limited’s (QBE) Long-Term Issuer Default Rating (IDR) at ‘A’, and its subsidiaries’ Insurer Financial Strength (IFS) ratings at ‘A+'. The Outlook is Stable. A full rating breakdown is provided below.

KEY RATING DRIVERS

The affirmation of QBE’s ratings and Stable Outlooks reflects the company’s historically strong operating performance, solid underlying portfolio of businesses, good diversified profile by region and product, and its strengthening balance sheet. Capital ratios have improved along with the quality of the capital base, and financial leverage is trending lower.

QBE’s earnings in 2012 and 2011 were impacted by an increased frequency and severity of natural catastrophes, including super storm Sandy, crop losses in the US, the Thailand floods, US tornados and the Christchurch earthquakes. 2012 results also included significant prior-period reserve strengthening, and higher amortisation and impairment charges. However, despite these significant items the group was able to produce a combined ratio of 97% in 2012, and has averaged 92% over the five years to end-2012. QBE’s underwriting result has consistently outperformed its peers’, and its aggressive acquisition strategy has enabled the group to build a strong underlying portfolio of businesses.

Notwithstanding past acquisitive success, Fitch believes acquisition risk was magnified by the absolute size and nature of some of the transactions, and views positively the focus on consolidation and operational efficiencies. To date the transformation program appears to be progressing well and should have a relatively quick return period and positive profit and loss impact. In addition, if well executed, the improvement to processes and service quality levels will support the group’s competitiveness.

Capital ratios strengthened during 2012, and coverage of QBE’s regulatory minimum capital requirement rose to 1.7x by end-2012, up from its weakest level over the past five years of 1.5x at end-2011. The shift in strategic focus away from acquisitions to a period of consolidation has been accompanied by a number of capital strengthening initiatives. In recent years, increasing amounts of goodwill and intangibles have negatively impacted capital ratios, having as a percentage of total equity increased from 29% at end-2007 to 53% at end-2012.

Capital initiatives have increased the contribution of Tier 1 capital to total capital and improved the composition of QBE’s capital base. Traditionally the group has used a mixture of ordinary equity and, increasingly, Tier 2 hybrid instruments to fund acquisitions which, under Fitch’s criteria, do not receive equity credit. By end-2011 Tier 2 capital made up 30% of QBE’s regulatory capital base, up from 9% at end-2007. The increase in the contribution of Tier 2 instruments halted during 2012 following a AUD600m share placement and resale of USD150m of Tier 1 perpetual capital securities. As a result, Tier 2 capital fell to 25% of total capital by end-2012. Capital strengthening initiatives have continued into 2013.

QBE’s financial leverage, measured by adjusted debt to total capital, improved to 28% by end-2012 and towards the mid-point when compared to Fitch’s median criteria guideline for an ‘A’ rated insurer. A stronger capital base and lower absolute debt level should see this metric continue to marginally strengthen over the next years. In calculating QBE’s financial leverage Fitch includes 100% of goodwill as part of total capital, as the agency considers these balances as supportable, as demonstrated by the group’s strong profit margins and interest coverage ratios.

Fitch considers asset risk to be very low, with little exposure to equities and non-investment grade bonds. QBE’s conservative investment approach is characterised by the weighting of highly rated cash and fixed-income securities in the portfolio: 99% at end-2012, of which around 80% were rated ‘AA-’ or higher.

RATING SENSITIVITIES

Triggers for a downgrade: An unexpected weakening of capital ratios in addition to on-going operational underperformance relative to peers. In the short term financial leverage of above 30%, and over the longer term interest coverage averaging below 7x, on-going reserve deficiencies or average combined ratios in excess of 103% could lead to a downgrade. However, stronger capital and leverage ratios provide a buffer to a period of extended underperformance.

Triggers for an upgrade: Fitch considers an upgrade to be unlikely, as QBE is, in the agency’s view, comfortable in running lower capital ratios and higher leverage ratios to support profitability. In addition, notwithstanding past success, acquisitions in recent years have created new exposures and increased the group’s risk profile.

List of rating actions:

QBE Insurance Group Limited (QBE):

Long-Term IDR affirmed at ‘A’; Outlook Stable;

GBP190,692,000 senior unsecured debt affirmed at ‘A-';

USD210,770,000 senior unsecured debt affirmed at ‘A-';

USD600,000,000 senior unsecured debt affirmed at ‘A-';

GBP300,000,000 perpetual preferred securities affirmed at ‘BBB’;

USD1,000,000,000 subordinated debt affirmed at ‘BBB’; and

GBP325,000,000 subordinated debt affirmed at ‘BBB’.

QBE Insurance (Australia) Limited:

IFS rating affirmed at ‘A+'; Outlook Stable.

QBE Insurance (International) Limited:

IFS rating affirmed at ‘A+'; Outlook Stable.

QBE Insurance Corporation:

IFS rating affirmed at ‘A+'; Outlook Stable.

QBE Insurance (Europe) Limited:

IFS rating affirmed at ‘A+'; Outlook Stable.

QBE Re (Europe) Limited:

IFS rating affirmed at ‘A+'; Outlook Stable.

QBE Hongkong & Shanghai Insurance Limited:

IFS rating affirmed at ‘A+'; Outlook Stable.

QBE Reinsurance Corporation:

IFS rating affirmed at ‘A+'; Outlook Stable.

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