Disasters strike QBE credit rating
After QBE's earnings were last year dragged down by natural disasters, Moody's said on Monday it would downgrade QBE's credit rating from A3 to Baa1, with a "negative" outlook, following a review.
Despite the company's moves to slash costs and move away from the acquisition-fuelled growth that occurred under former chief executive Frank O'Halloran, Moody's analyst Alan Murray expressed concerns about its leverage and said the group's exposure to catastrophes was "high" relative to its capital levels.
QBE's earnings in the United States - where it derives about a third of its profit - were also likely to be squeezed by tougher government rules on insurance of troubled mortgages, of which QBE is a key provider.
"The downgrade of the rating primarily reflects the group's weakened earnings, internal capital generation and debt service coverage measures, as well as QBE's sustained elevated financial and operational leverage profile, considered on both a nominal and tangible basis," Mr Murray said.
The cut comes after QBE said in February it would shed about 700 jobs from its operations in Australia, Europe and North America and fill the roles with staff in the Philippines.
Mr Murray acknowledged the company's moves to rein in expenses, but said the changes would be felt gradually.
Despite the downgrade, QBE rose 14¢, or 1 per cent, to $13.14.
In positive news for QBE, CommSec analyst Ross Curran said its cropping insurance arm in the US was set to benefit from solid revenue growth due to another year of strong crop planting.
QBE is the third-largest provider of crop insurance in the US, but the business has been hit by a jump in claims caused by drought.
Mr Curran said if claims returned to normal levels this year QBE's underwriting business would benefit from a $200 million lift in profits from underwriting.
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Moody's downgraded QBE's credit rating from A3 to Baa1 and assigned a "negative" outlook, citing weaker earnings growth and continuing concerns about the insurer's debt levels.
Moody's said the downgrade reflected weakened earnings, weaker internal capital generation and debt-service coverage, sustained elevated financial and operational leverage, and a high exposure to catastrophes relative to its capital levels.
The downgrade signals that credit agencies see higher risk around QBE's earnings and debt profile; investors should note Moody's concerns about leverage and catastrophe exposure, and that the rating action followed weaker earnings after natural disasters.
Despite the downgrade, QBE's share price rose 14 cents, or about 1%, to $13.14 on the day the downgrade was reported.
QBE has been slashing costs and moving away from acquisition-driven growth, and in February announced plans to cut about 700 jobs across Australia, Europe and North America while filling roles with staff in the Philippines.
QBE derives about a third of its profit from the United States, but Moody's noted US earnings could be squeezed by tougher government rules on insurance for troubled mortgages, which is a key area for the company.
CommSec analyst Ross Curran said QBE's US cropping insurance arm — the third-largest provider in the market — could benefit from solid revenue growth due to another strong crop planting year; however the business has recently been hit by a jump in drought-related claims.
According to the article, CommSec suggested that if crop insurance claims return to more normal levels this year, QBE's underwriting business could see around a $200 million lift in profits from underwriting.
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