Fitch Ratings has affirmed Australia-based QBE Insurance Group Limited's Long-Term Issuer Default Rating (IDR) at 'A-' and the Insurer Financial Strength (IFS) Ratings of its core subsidiaries at 'A+' (Strong).
The Outlook on the ratings is Stable. A full list of rating actions is at the end of this commentary.
The affirmation reflects QBE's 'Strong' capitalisation and leverage, 'Favourable' company profile and 'Strong' financial performance and earnings.
Key Rating Drivers
Steady Capital Metrics: Fitch assesses QBE's capitalisation and leverage as 'Strong'. We estimate its Fitch Prism Model Score remained in the upper end of 'Very Strong' at end-1H22, similar to the end-2021 result. Coverage of the regulatory prescribed capital amount (PCA) was high (end-1H22: 1.77x) and compares well against Fitch's criteria guidelines for the 'A' IFS Rating category. Non-risk adjusted capital metrics, including net written premium to capital (end-1H22: 1.9x), remain commensurate with the rating.
QBE's financial leverage is moderate and supportive of the ratings. Its Fitch-calculated financial leverage ratio (FLR) reduced to 24% by end-1H22 (end-2021: 27%) following the redemption of a portion of its subordinated debt, which had previously been refinanced.
Recovery in Underwriting Performance: QBE's underwriting performance, which was volatile in the past five years, continued to improve in 1H22 with the non-life group achieving underwriting profitability across all operating segments. The statutory combined ratio improved to 82% and 92% in 1H22 and 2021, respectively, from 107% in 2020, reflecting the favourable pricing environment and portfolio underwriting actions by QBE. The 1H22 ratio also benefitted from the sharp uptick in the discount rates used to value claim liabilities.
We expect underwriting profitability to moderate over the next six to 18 months due to inflationary pressure and higher reinsurance costs. QBE says that while premium-rate increases have exceeded observed inflation in most business classes, it is nonetheless likely to strengthen claim reserves for long-tailed lines. Catastrophe costs have been elevated in recent periods and are likely to drive up QBE's reinsurance costs. These will be partly offset by Covid-19-related reserve releases relating to Australian business-interruption policies on favourable court outcomes.
Market Volatility Affects Earnings: The strong underwriting gains in 1H22 were partly offset by unrealised losses stemming from QBE's bond portfolio, causing net profit after tax to drop to USD151 million in 1H22, from USD441 million in 1H21. However, we expect QBE's near-term earnings to be supported by stronger reinvestment yields, as the insurer reinvests its fixed-income portfolio, which has a relatively short duration (end-2021: 2.1 years).
Favourable Company Profile: Fitch ranks QBE's company profile as 'Favourable' as a result of a 'Favourable' business profile and 'Moderate/Favourable' corporate governance compared with that of other Australian insurers. It has a large operating scale and diversified international operations. Stronger underwriting performance in its European and Australian businesses helped to offset weaker performance in its North American operations in recent years.
Adequate Financial Flexibility: QBE has demonstrated a strong ability to access both debt and equity capital markets. Institutional and retail investors have supported QBE's various capital initiatives, and Fitch believes sustained robust operational performance will help underpin financial flexibility. QBE's fixed-charge coverage ratio (2021: 4.9x; 2020: -3.3x) remained below Fitch's criteria guidelines for the 'A' IFS Rating category because of volatile profitability.
Low Investment Risks: QBE has a conservative investment strategy and its investment portfolio is weighted towards high-quality fixed-income securities. We expect QBE's Fitch-calculated risky asset ratio (end-2021: 12%) to increase as the insurer adds more equity and growth assets to its investment portfolio. This follows a significant reduction in risks of the investment portfolio following Covid-19 related market volatility, where QBE disposed of its entire portfolio of high-yield and emerging-market debt investments, as well as listed equities.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
sustained deterioration in the financial performance, with the combined ratio sustained above 102%
PCA coverage staying below 1.5x and the Fitch Prism Model Score below the upper end of 'Strong' for a prolonged period
FLR remaining above 30%
A significant worsening in the company profile, evident from a loss of market share and franchise, may also lead to a downgrade.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
material improvement in group financial fundamentals, with return on equity consistently above 10% and the combined ratio below 94%
FLR below 23% and fixed-charge coverage ratio above 9x on a prolonged basis, while maintaining a Fitch Prism Model Score of 'Very Strong'.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
QBE INSURANCE GROUP LIMITED 
