OREANDA-NEWS. Fitch Ratings has affirmed QBE Insurance Group Limited's (QBE) Long-Term Issuer Default Rating (IDR) at 'A-', and affirmed its subsidiaries' Insurer Financial Strength (IFS) ratings at 'A+'. The Outlook on the ratings has been is revised to Stable from Negative. QBE's subordinated debt issues have also been upgraded to 'BBB'. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

The affirmation of QBE's ratings reflect its very strong capital ratios, improving financial leverage ratios, a historically strong underwriting performance - which is supported by sound aggregate management and a comprehensive reinsurance programme - and a low-risk investment portfolio.

The revision of the Outlook to Stable from Negative reflects Fitch's view that the stronger operating performance, including an improvement in reserve adequacy, is more supportive of the remaining goodwill on the group's balance sheet.

Following a change in the agency's notching criteria QBE's three subordinated debt issues have been upgraded from 'BBB-' to 'BBB'. Fitch assumes a "Poor" baseline recovery, which results in a two-notch difference from QBE's IDR. Then based on the regulatory point of non-viability being a low trigger, Fitch classifies non-performance risk as "Minimal" and applies no further notching.

The group implemented a number of initiatives during 2014 that strengthened its capital and financial leverage ratios. Fitch expects these to improve further through 2015, which would build solid buffers for the group's ratings that had previously been absent. Coverage of the regulatory prescribed capital amount (PCA) was a very strong 1.70x at end-2014, and at the bottom of the group's target range of 1.7x-1.9x.

The group's combined ratio improved to 96% in 2014 (2013: 98%) and has averaged 96% in the five years to 2014. This remains comparable to similar and more highly rated peers and favourably against Fitch's median criteria guideline of 103% for an 'A' rating category.

Fitch considers it important for QBE to generate above-average underwriting results to support earnings and interest coverage, given the group's high level of intangibles and low-yielding, low-risk investment portfolio. The latter is dominated by highly rated short-duration cash and fixed-income securities, and in the current low interest rate environment, the total investment yield has fallen from 5.5% (running yield 2.6%) in 2009 to 2.7% (running yield 2.3%) in 2014.

Goodwill as a percentage of equity declined to 31% at end-2014 from a peak of 45% at end-2011 and will fall further following additional business disposals in 2015. Impairments were low in 2014 after the large write-offs in 2013, but until margins and profitability have strengthened further, the agency will continue to place additional emphasis on financial leverage excluding goodwill. The announced sale of the US lender-placed business in 2015 includes intangible write-offs but will have no rating impact.

QBE's financial leverage, measured by adjusted debt to total capital, was 23% at end-2014 and at the low end of Fitch's median criteria guideline for an 'AA' rating category. However, excluding goodwill, the ratio increases to 30%, which is at the low end of the 'A' rating category.

EBITDA interest coverage remains weak, but has increased to 5x in 2014 from a low of 3x in 2013, and has averaged 5x over the five years to end-2014. Fitch believes this ratio will continue to improve in 2015, due to stronger operating performance and lower interest cost.

RATING SENSITIVITIES

The key rating triggers that could lead to a downgrade include, further goodwill impairments indicating more underlying operational problems, and a failure to adequately strengthen financial flexibility. Further weakness in the franchise leading to a loss of market share, and interest coverage ratios persistently below similarly rated peers would result in negative pressure on QBE's ratings. Persistent interest coverage ratios below 7x, combined ratios greater than 100% and coverage of the group regulatory PCA below 150%, could result in a downgrade.

The key rating triggers that could lead to an upgrade would be the successful implementation of the operational transformation programme, resulting in the group achieving leading market positions and performance in all its major markets. Fitch would expect to see quantitative metrics that are better than QBE's 'A' rated peers and comparable to its 'AA' rated peers.

FULL LIST OF RATING ACTIONS

QBE Insurance Group Limited (QBE):
Long-Term IDR affirmed at 'A-'; Outlook Revised to Stable;
USD600,000,000 senior unsecured debt affirmed at 'BBB+';
GBP300,000,000 perpetual preferred securities affirmed at 'BBB-';
USD1,000,000,000 subordinated debt upgraded to 'BBB';
GBP325,000,000 subordinated debt upgraded to 'BBB' and
USD700,000,000 subordinated debt upgraded to 'BBB'.

QBE Insurance (Australia) Limited:
IFS rating affirmed at 'A+'; Outlook Revised to Stable.

QBE Insurance (International) Ltd.:
IFS rating affirmed at 'A+'; Outlook Revised to Stable.

QBE Insurance Corporation:
IFS rating affirmed at 'A+'; Outlook Revised to Stable.

QBE Insurance (Europe) Limited:
IFS rating affirmed at 'A+'; Outlook Revised to Stable.

QBE Re (Europe) Limited:
IFS rating affirmed at 'A+'; Outlook Revised to Stable.

QBE Hongkong & Shanghai Insurance Limited:
IFS rating affirmed at 'A+'; Outlook Revised to Stable.

QBE Reinsurance Corporation:
IFS rating affirmed at 'A+'; Outlook Revised to Stable.

Equator Reinsurances Limited:
IFS rating affirmed at 'A+'; Outlook Revised to Stable.