Best Affirms Ratings on QBE and Operating Companies

October 1, 2009

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit ratings (ICR) of “a+” of UK-based QBE Insurance (Europe) Limited , Australia’s QBE Insurance (International) Limited and QBE Reinsurance (Europe) Limited, which is based in Ireland. The companies are “key operating subsidiaries” of Australia’s QBE Insurance Group Limited, “the non-operating holding company of the QBE group of companies,” Best explained.

Best also affirmed the ICR of “bbb+” and all debt ratings of QBE. And has assigned a debt rating of “bbb+” to the £550 million [$880 million] 6.125 percent senior unsecured fixed rate notes, due 2015 of QBE. The outlook for all ratings is stable.

Best said it “believes that QBE’s consolidated risk-adjusted capitalization will remain excellent in 2009, despite strong growth in premium income. Solid operating results are likely to support an increase in retained earnings, and financial flexibility is good.

“The group has a track record of raising capital through the equity and debt markets to support its acquisition-based growth strategy. In 2008, QBE raised A$2 billion [US$1.764 billion] through a fully underwritten institutional placement, and in January 2009, it raised an additional A$114.5 million [US$100.1 million]. These funds have been used to support various acquisitions in the United States, Australia and Europe.”

In addition Best noted that as of February 2009, “QBE ceased hedging its exposure to shareholders’ funds held in currencies other than the Australian dollar, the group’s reporting currency. Although this strategy is expected to increase the volatility of consolidated shareholders’ funds in absolute terms, Best anticipates greater stability in risk-adjusted capitalization as shareholders’ funds now move in line with changes in assets and liabilities held in non-Australian denominated currencies. As at half year 2009, consolidated shareholders’ funds fell to A$10.232 billion from A$11.159 billion [US 9.02 billion from US$9.84 billion] (as at year-end 2008), owing to the strengthening of the Australian dollar during the first half of 2009.

“An excellent consolidated pre-tax profit in excess of A$2 billion [US$1.764 billion] is anticipated in 2009 (2008: A$2.42 billion [US$2.133 billion]), subject to normal catastrophe activity during the remainder of the year.”

Best also indicated that it expects the combined ratio to increase to approximately 90 percent (2008: 87.5 percent), after the impact of the weak global economic environment on the group’s loss experience, particularly for credit related business. Although rates are increasing for classes of business affected by the large loss events of 2008, market conditions remain flat for casualty classes.”

Further ahead, Best said it “believes the group’s robust risk management framework, well diversified underwriting portfolio, prudent reserving strategy and low-risk investment strategy are likely to support consistent good performance.

“QBE has a robust business profile, which is supported by excellent product and geographic diversification. The group benefits from a strong presence in Australia and the London market and has significantly increased its market share in the United States through a number of significant acquisitions.

“QBE continues to enhance its competitive position in its core regions (Australia, Europe, the Americas and Asia-Pacific) through its acquisitions. In 2008 and the first half of 2009, QBE purchased various underwriting agencies, which A.M. Best believes will provide the group with greater control of distribution in certain local markets.”

Best summarized the rating actions on QBE as follows:
The following debt ratings have been affirmed:
QBE Insurance Group Limited—
— “bbb+” on USD 211 million 9.75 percent senior unsecured fixed rate notes, due
— “bbb+” on GBP 191 million 10.00 percent senior unsecured fixed rate notes, due
— “bbb” on USD 250 million 5.65 percent subordinated notes, due 2023
— “bbb-” on USD 550 million 6.797 percent perpetual preferred securities (issued by QBE Capital Funding II L.P. (Jersey) and guaranteed by QBE)
— “bbb-” on GBP 300 million 6.857 percent perpetual preferred securities (issued by QBE Capital Funding L.P. (Jersey) and guaranteed by QBE)

The following debt rating has been assigned:
QBE Insurance Group Limited—
— “bbb+”on GBP 550 million 6.125 percent senior unsecured fixed rate notes, due

Source: A.M. Best –

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