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Fitch affirms QBE credit ratings

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QBE had its Issuer Default Rating (IDR) and its Insurer Financial Strength (IFS) ratings affirmed at ‘A’ and ‘A+’ respectively, Fitch Ratings announced today. The outlook for both are stable.

Fitch said the ratings reflect the Australian group’s “diverse business profile, historically strong operating results, demonstrated financial flexibility and conservative underwriting and investment approach.”

On the other side of the coin however, was a lowering trend of capital ratios and a high financial leverage. The ratings agency said if these aspects were teamed with weaker operating performance the groups financial flexibility might suffer.

Despite a comprehensive risk excess and catastrophe program being put in place at the beginning of last year, higher than expected losses from natural catastrophe’s resulted in significant losses for both QBE and their reinsurer, Equator Re.

Fitch said QBE’s response to these losses was appropriate.

“In response to an adverse claims experience in financial year financial year (FY)11, QBE has advised of increases to premium rates, the reduction of certain underwriting exposures and an increase in the group’s large and catastrophe claims allowance to 10% of NEP (FY10: 9%).

“With a good history of correcting underwriting under-performance, Fitch believes these measures should support an improved underwriting performance in FY12.

“Moreover, should natural peril loss activity show some reversion towards long term means this would have a positive earnings impact.”

Declining government yields and lower risk free rates are expected to keep investment returns suppressed, and in doing so will reduce the risk margins in QBE’s claims reserves.

The ratings agency added that they don’t think an upgrade is likely in the near future, as QBE is operating with lower capital ratios and higher financial leverage in conjunction with its acquisition-led strategy.

“Moreover, recent acquisitions have been particularly large and have resulted in QBE developing exposures to insurance classes and distribution channels new to the group.

“Although past acquisitive success does help to mitigate acquisition risk, the agency nonetheless believes acquisition risk has been magnified by the absolute size and nature of recent transactions.”