22.01.2016, 10:33
Fitch Affirms QBE at 'A+'; Outlook Stable
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+'. QBE Lenders' Mortgage Insurance Limited's (QBELMI) IFS Rating has been affirmed at 'AA-'. The Outlook on the ratings is Stable. A full list of rating actions is at the end of this commentary.
The affirmation of QBE's ratings reflect its very strong capital ratios, solid financial leverage ratios, historically strong underwriting performance - which is supported by sound aggregate management and a comprehensive reinsurance programme - and a low-risk investment portfolio. The group's operational efficiency program and other remediation efforts are supportive of future operating performance, reserve adequacy has improved and previously weak interest coverage ratios are strengthening.
KEY RATING DRIVERS (QBE)
We assess QBE's capital ratios as very strong. Successful capital initiatives in 2014 and 2015 included hybrid debt and equity issuance, and the reinsurance of a run-off portfolio. These actions have resulted in a coverage ratio of the regulatory prescribed capital amount (PCA) of 1.67x by end-June 2015 (1H15). We expect this ratio to strengthen in the short term given it sits at the bottom of the group's target range of 1.7x-1.9x.
Financial flexibility has improved on a stronger operating performance and lower financial leverage. We will continue to look at QBE's financial leverage ratios including and excluding goodwill, until its margins and profitability strengthen further. QBE's goodwill as a percentage of equity had declined to 30% by end-1H15, from a peak of 45% at end-2011. QBE's financial leverage, as measured by Fitch's adjusted debt/total capital ratio, was 23% at end-1H15 and at the low-end of our median criteria guidelines for an 'AA' rated insurer. Excluding goodwill, the ratio was 30%, just below Fitch's 'A' median criteria guideline.
QBE's combined ratio (CR) was 95% in 1H15, and averaged 96% in the five years to end-2014. This is consistent with peers, and stronger than Fitch's median criteria guideline of 103% for an 'A' rated insurer. We see stronger CRs as critical because of the significant level of intangibles and low-yielding investment portfolio. Fitch views average EBITDA interest coverage of 5x over the five years to end-2014, as weak; although the improvement to 7x in 1H15 from a low of 3x in 2013 is positive.
KEY RATING DRIVERS (QBELMI)
The company's 'AA-'/Stable rating reflects a robust standalone credit profile which includes strong capital ratios and a major position in the Australian lender's mortgage insurance (LMI) sector. Solid operating performances and no debt support financial flexibility, and internally generated capital is able to support growth if required.
QBELMI is able to attain a higher standalone rating than the main subsidiaries of its ultimate parent, QBE due to the strength of the regulatory ring fencing around QBELMI and its limited financial reliance on the group as a whole.
The operating environment and macroeconomic conditions are important rating drivers and despite a period of below trend growth, the Australian economy is relatively sound. Household leverage is at historic highs and falling mortgage rates have supported rapid price appreciation in the major Sydney and Melbourne housing markets. However, a conservative underwriting approach increasingly focused on serviceability, has resulted in mortgage debt concentrated in higher income households, with better debt servicing ability.
The group reported that QBELMI's gross written premiums are likely to be around 30% lower in 2015. Actions by the Australian Prudential Regulation Authority (APRA) have resulted in lenders reducing the volume of higher loan/value and investor lending, which in turn has significantly reduced premium volumes. Helping to offset the decline in premiums, QBELMI has announced that its 25% reinsurance quota share arrangement won't be renewed in 2016.
RATING SENSITIVITIES
Key rating triggers that could lead to a downgrade (QBE) include: further goodwill impairments indicating more underlying operational problems and a failure to adequately strengthen financial flexibility; further weakness in the franchise leading to loss of market share; and persistent interest coverage ratios below that of similarly rated peers. Persistent interest coverage ratios of below 7x, CRs greater than 100%, and coverage of the group regulatory PCA that falls below 150%, could result in a downgrade.
Triggers for a downgrade (QBELMI): A severe deterioration in the operating environment as a result of rising unemployment and other macroeconomic factors remains the most serious threat to the ratings of QBELMI. However, Fitch continues to see this as unlikely and is forecasting a relatively solid economic performance in coming years.
A downgrade of QBE's ratings could result in a downgrade of QBELMI's rating despite limited financial reliance on the group. Fitch would not typically rate a group member more than one to three notches above the group assessment.
Coverage of QBELMI's PCA falling below 1.3x for a sustained period could result in a downgrade.
Key rating triggers that could lead to an upgrade (QBE) would be success from the operational transformation programme that results in gaining leading positions and performance in all major markets in which it operates. In addition, Fitch would expect to see quantitative metrics consistent with 'AA' rated peers
Triggers for an upgrade (QBELMI): Fitch believes a ratings upgrade for QBELMI is unlikely in the near term given the company's profile, which, as a monoline insurer, results in a narrow product focus.
The full list of rating actions is as follows:
QBE Insurance Group Limited (QBE):
Long-Term IDR affirmed at 'A-'; Outlook Stable;
USD600m senior unsecured debt affirmed at 'BBB+';
GBP300m perpetual preferred securities affirmed at 'BBB-';
USD1bn subordinated debt affirmed at 'BBB';
GBP325m subordinated debt affirmed at 'BBB';
USD700m subordinated debt affirmed at 'BBB';
USD300m subordinated debt affirmed at 'BBB' and
AUD200m subordinated debt affirmed at 'BBB'.
QBE Insurance (Australia) Limited:
IFS rating affirmed at 'A+'; Outlook Stable.
QBE Insurance (International) Ltd.:
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.
Equator Reinsurances Limited:
IFS rating affirmed at 'A+'; Outlook Stable.
QBE Lenders' Mortgage Insurance Limited
IFS rating affirmed at 'AA-'; Outlook Stable.
The affirmation of QBE's ratings reflect its very strong capital ratios, solid financial leverage ratios, historically strong underwriting performance - which is supported by sound aggregate management and a comprehensive reinsurance programme - and a low-risk investment portfolio. The group's operational efficiency program and other remediation efforts are supportive of future operating performance, reserve adequacy has improved and previously weak interest coverage ratios are strengthening.
KEY RATING DRIVERS (QBE)
We assess QBE's capital ratios as very strong. Successful capital initiatives in 2014 and 2015 included hybrid debt and equity issuance, and the reinsurance of a run-off portfolio. These actions have resulted in a coverage ratio of the regulatory prescribed capital amount (PCA) of 1.67x by end-June 2015 (1H15). We expect this ratio to strengthen in the short term given it sits at the bottom of the group's target range of 1.7x-1.9x.
Financial flexibility has improved on a stronger operating performance and lower financial leverage. We will continue to look at QBE's financial leverage ratios including and excluding goodwill, until its margins and profitability strengthen further. QBE's goodwill as a percentage of equity had declined to 30% by end-1H15, from a peak of 45% at end-2011. QBE's financial leverage, as measured by Fitch's adjusted debt/total capital ratio, was 23% at end-1H15 and at the low-end of our median criteria guidelines for an 'AA' rated insurer. Excluding goodwill, the ratio was 30%, just below Fitch's 'A' median criteria guideline.
QBE's combined ratio (CR) was 95% in 1H15, and averaged 96% in the five years to end-2014. This is consistent with peers, and stronger than Fitch's median criteria guideline of 103% for an 'A' rated insurer. We see stronger CRs as critical because of the significant level of intangibles and low-yielding investment portfolio. Fitch views average EBITDA interest coverage of 5x over the five years to end-2014, as weak; although the improvement to 7x in 1H15 from a low of 3x in 2013 is positive.
KEY RATING DRIVERS (QBELMI)
The company's 'AA-'/Stable rating reflects a robust standalone credit profile which includes strong capital ratios and a major position in the Australian lender's mortgage insurance (LMI) sector. Solid operating performances and no debt support financial flexibility, and internally generated capital is able to support growth if required.
QBELMI is able to attain a higher standalone rating than the main subsidiaries of its ultimate parent, QBE due to the strength of the regulatory ring fencing around QBELMI and its limited financial reliance on the group as a whole.
The operating environment and macroeconomic conditions are important rating drivers and despite a period of below trend growth, the Australian economy is relatively sound. Household leverage is at historic highs and falling mortgage rates have supported rapid price appreciation in the major Sydney and Melbourne housing markets. However, a conservative underwriting approach increasingly focused on serviceability, has resulted in mortgage debt concentrated in higher income households, with better debt servicing ability.
The group reported that QBELMI's gross written premiums are likely to be around 30% lower in 2015. Actions by the Australian Prudential Regulation Authority (APRA) have resulted in lenders reducing the volume of higher loan/value and investor lending, which in turn has significantly reduced premium volumes. Helping to offset the decline in premiums, QBELMI has announced that its 25% reinsurance quota share arrangement won't be renewed in 2016.
RATING SENSITIVITIES
Key rating triggers that could lead to a downgrade (QBE) include: further goodwill impairments indicating more underlying operational problems and a failure to adequately strengthen financial flexibility; further weakness in the franchise leading to loss of market share; and persistent interest coverage ratios below that of similarly rated peers. Persistent interest coverage ratios of below 7x, CRs greater than 100%, and coverage of the group regulatory PCA that falls below 150%, could result in a downgrade.
Triggers for a downgrade (QBELMI): A severe deterioration in the operating environment as a result of rising unemployment and other macroeconomic factors remains the most serious threat to the ratings of QBELMI. However, Fitch continues to see this as unlikely and is forecasting a relatively solid economic performance in coming years.
A downgrade of QBE's ratings could result in a downgrade of QBELMI's rating despite limited financial reliance on the group. Fitch would not typically rate a group member more than one to three notches above the group assessment.
Coverage of QBELMI's PCA falling below 1.3x for a sustained period could result in a downgrade.
Key rating triggers that could lead to an upgrade (QBE) would be success from the operational transformation programme that results in gaining leading positions and performance in all major markets in which it operates. In addition, Fitch would expect to see quantitative metrics consistent with 'AA' rated peers
Triggers for an upgrade (QBELMI): Fitch believes a ratings upgrade for QBELMI is unlikely in the near term given the company's profile, which, as a monoline insurer, results in a narrow product focus.
The full list of rating actions is as follows:
QBE Insurance Group Limited (QBE):
Long-Term IDR affirmed at 'A-'; Outlook Stable;
USD600m senior unsecured debt affirmed at 'BBB+';
GBP300m perpetual preferred securities affirmed at 'BBB-';
USD1bn subordinated debt affirmed at 'BBB';
GBP325m subordinated debt affirmed at 'BBB';
USD700m subordinated debt affirmed at 'BBB';
USD300m subordinated debt affirmed at 'BBB' and
AUD200m subordinated debt affirmed at 'BBB'.
QBE Insurance (Australia) Limited:
IFS rating affirmed at 'A+'; Outlook Stable.
QBE Insurance (International) Ltd.:
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.
Equator Reinsurances Limited:
IFS rating affirmed at 'A+'; Outlook Stable.
QBE Lenders' Mortgage Insurance Limited
IFS rating affirmed at 'AA-'; Outlook Stable.
Комментарии