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Fitch Revises Outlook on QBE to Positive; Affirms at IFS 'A+'
July 21, 2017 / 2:50 AM / in 3 months

Fitch Revises Outlook on QBE to Positive; Affirms at IFS 'A+'

(The following statement was released by the rating agency) SINGAPORE, July 20 (Fitch) Fitch Ratings has revised the Outlooks on QBE Insurance Group Limited's (QBE) Long-Term Issuer Default Rating (IDR) and its subsidiaries' Insurer Financial Strength (IFS) ratings to Positive from Stable. The IDR on QBE is affirmed 'A-' while the IFS ratings on the subsidiaries are affirmed at 'A+'. A full list of rating actions is at the end of this commentary. The Positive Outlooks on QBE's ratings incorporate the improvement in operating performance as a result of the group's operational efficiency programme and other remediation efforts. Fitch expects these ongoing efforts to support QBE's operating performance and maintain sound financial fundamentals, including solid capital ratios and adequate financial leverage ratios. KEY RATING DRIVERS QBE's coverage of the regulatory prescribed capital amount (PCA) has improved to above 1.7x since 2015 from 1.67x in 2014. The PCA coverage rose to 1.76x by end-2016 from 1.73x at end-2015, driven by consistently sound financial performance and the group's efforts to streamline operations and enhance operational efficiencies. The coverage is stronger than Fitch's median criteria guideline of 1.60x for a 'AA' IFS rating. Its capitalisation, as measured by Fitch's Prism Factor-Based Capital Model (FBM), reached 'Strong' at end-2016. QBE's financial leverage, as measured by Fitch's adjusted debt/total capital ratio, was 23% at end-2016, stronger than the median criteria guidelines for an 'A' rated insurer. Excluding goodwill, the ratio was 30%, slightly weaker than Fitch's 'A' median criteria guideline. Fitch will continue to review QBE's financial leverage ratios, including and excluding goodwill, until margins and profitability strengthen further but place more emphasis on the ratio including goodwill. QBE's goodwill as a percentage of equity declined to 30% by end-2016, from a peak of 45% in 2011. QBE's reported combined ratio improved to 94.0% in 2016 from 94.9% in 2015 and averaged 96% in the five years to end-2016. This is stronger than Fitch's median criteria guideline of 103% for an 'A' rated insurer. We see stronger combined ratios as important, given the wide geographical spread and diversified businesses of the group. QBE's risky asset ratio, which measures equities, non-investment grade bonds and affiliate investments as a proportion of shareholders' equity, fell below 20% at end-2016, stronger than Fitch's median criteria guideline of 50% for an 'AA'rated insurer. We expect the group's investment portfolio to remain conservatively managed, with cash and fixed-income securities making up above 85% of QBE's portfolio at end-2016. The company's interest-coverage of 5x at end-2016 was weaker than Fitch's median criteria guideline of 7x for an 'A'rated insurer. Nonetheless, this has improved from a low of 3x in 2013. We expect further strengthening over time with the group's ongoing remediation efforts. Reserve risk is an important credit factor due to the nature of the group's profile and high reserve leverage. Our neutral assessment of the company's reserve adequacy results from the large risk margins held in claims reserves. We calculate QBE's claims reserve adequacy ratio (carried claims reserves/estimated reserving mid-points) at 103% at end-2016. RATING SENSITIVITIES Key rating triggers for an upgrade include a combined ratio of consistently below 95%, PCA coverage of above 1.7x for a prolonged period and its capital, as measured by Fitch's Prism Factor-Based Capital Model (FBM), reaching 'Very Strong' levels, alongside consistently favourable financial leverage ratio, sound market franchise and sustainable premium base. Key rating triggers for a downgrade include deterioration in its financial fundamentals, such as significant weakness in the business profile leading to loss of market share and franchise; combined ratio above 100%; PCA coverage of below 1.5x on a prolonged basis; financial leverage of above 30%; and fixed-charge coverage ratio of consistently below 4x. The full list of rating actions is as follows: QBE Insurance Group Limited (QBE): Long-Term IDR affirmed at 'A-'; Outlook revised to Positive from Stable USD600 million senior unsecured debt affirmed at 'BBB+' USD1 billion subordinated debt affirmed at 'BBB' GBP325 million subordinated debt affirmed at 'BBB' USD700 million subordinated debt affirmed at 'BBB' USD300 million subordinated debt affirmed at 'BBB' AUD200 million subordinated debt affirmed at 'BBB' GBP327 million subordinated debt affirmed at 'BBB' USD524 million subordinated debt affirmed at 'BBB' USD400 million subordinated debt affirmed at 'BBB' QBE Insurance Corporation: IFS rating affirmed at 'A+'; Outlook revised to Positive from Stable QBE Insurance (Europe) Limited: IFS rating affirmed at 'A+'; Outlook revised to Positive from Stable QBE Re (Europe) Limited: IFS rating affirmed at 'A+'; Outlook revised to Positive from Stable QBE Hongkong & Shanghai Insurance Limited: IFS rating affirmed at 'A+'; Outlook revised to Positive from Stable QBE Reinsurance Corporation: IFS rating affirmed at 'A+'; Outlook revised to Positive from Stable Equator Reinsurances Limited: IFS rating affirmed at 'A+'; Outlook revised to Positive from Stable Contact: Primary Analyst Wan Siew Wai Senior Director +65 6796 7217 Fitch Ratings Singapore Pte Ltd. One Raffles Quay, South Tower #22-11 Singapore 048583 Secondary Christopher Han Associate Director +65 6796 7224 Committee Chairman Jeff Liew Senior Director +852 2263 9939 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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