QBE’s capitalisation seen as strong

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QBE’s capitalisation metrics are expected to remain solid despite an expected 2020 statutory loss, says Fitch Ratings in a report last month.

QBE, Australia’s biggest insurer by GWP, raised around $1.3bn in capital during 2020, including $750m in new shares and $500m in additional Tier 1 debt in anticipation of COVID-19 related claims and investment losses. Management expects coverage of the regulatory prescribed capital amount (PCA) to be around 1.70x-1.75x by end-2020 (end-1H20: 1.8x; end-2019: 1.71x).

Fitch has revised the outlook on all the ratings of Australia-based QBE Insurance Group and its subsidiaries to “negative” from “stable”. The agency has affirmed QBE’s Long-Term Issuer Default Rating (IDR) at ‘A-‘ and the Insurer Financial Strength (IFS) Ratings of the core subsidiaries’ at ‘A+’ (Strong).

The affirmation reflects QBE’s ‘Strong’ capitalisation and leverage, ‘Favourable’ business profile, and ‘Strong’ financial performance and earnings. The negative outlook reflects the material drop in QBE’s 2020 financial performance and the uncertainty over a recovery in its profitability.

Financial performance

The company announced a significant deterioration in its 2020 financial performance with management expecting a statutory net after-tax loss of around $1.5bn for 2020 compared with a net profit of $547m in 2019.

The expected 2020 statutory loss is a result of goodwill impairment and tax asset write-downs totalling $520m, a COVID-19 impact of $470m, $360m in adverse prior accident-year claims development and elevated catastrophe losses of $130m. Management expects additional pandemic-related losses of around $130m in 2021. QBE also increased the probability of adequacy of its claim reserves to 91.2% by end-1H20 from 90% at end-2019 in response to the heightened reserve uncertainty arising from COVID-19.

The group’s statutory combined ratio, which includes the impact of changes in risk-free rates used to discount net outstanding claims, rose to 109.5% in 1H20, from 100% in 2019 and 95.9% in 2018. The ratio for 9M20, excluding the impact of risk-free rate changes, was around 102%. However, Fitch expects a recovery in the ratio to be aided by positive pricing momentum across QBE’s commercial-line portfolio, and management’s continued focus on operational efficiency programmes across the group.

Business profile

Fitch ranks QBE’s business profile as ‘Favourable’ against that of all other Australian insurers due to its ‘Most Favourable’ competitive positioning, ‘Moderate’ business risk profile and ‘Favourable’ diversification. The insurer has a large operating scale and diversified international operations.

Stronger underwriting performance in its European, Australian and New Zealand businesses has helped offset weaker performance in its North American operations in recent years.

 



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