Rating agency Moody’s has changed its outlook on Australian re/insurer QBE from stable to negative, after the company forecast that its after-tax losses would amount to USD 1.5 billion over 2020.
Analysts said that the downgrade reflects QBE’s earnings volatility, as well as its relatively weak earnings profile compared to its peers.
At the same time, Moody’s opted to affirm its A3 issuer rating on the company.
QBE’s 2020 losses include $520 million write-down of goodwill and deferred tax assets in its North American business, $470 million of COVID-19 related costs, $360 million for adverse prior year reserve development, and $130 million for higher than expected natural catastrophe costs loss.
With catastrophe losses so far over its allowance for the year, QBE also confirmed that losses had gone “well into” its catastrophe aggregate reinsurance program.
Despite these challenges, Moody’s said the affirmation of QBE’s ratings reflects its broad product diversification, strong capitalization, and strong asset quality.
The group benefits also from strong levels of capital, and its capital position was further strengthened by the $750 million institutional placement equity raising in April and further equity raising of AUD 91.5 million via a Share Purchase Plan.
Additionally, QBE’s investment portfolio was substantially de-risked in 1H 2020, exiting investments in equities and high yield and emerging market debt. This has resulted in a notable reduction in the level of high risk assets as a proportion of shareholders’ equity.
Moody’s sees a ratings upgrade as unlikely for QBE in the near-term, but acknowledged that the rating outlook could return to stable if profitability improves on a sustainable basis, or if its combined ratio improves to 96% or better.
On the other hand, ratings could face a downgrade if profitability declines, QBE reports a combined ratio of 99% or higher, its solvency margin falls significantly, or if it sees large catastrophe losses or other operating losses over the next 12 months.
