Fitch Rates QBE's Subordinated Tier 2 Notes 'BBB'

(The following statement was released by the rating agency) Fitch Ratings-Sydney/Singapore-18 August 2020: Fitch Ratings has assigned a 'BBB' rating to QBE Insurance Group Limited's (A-/Stable) AUD500 million regulatory compliant Tier-2 subordinated securities issued in August 2020. The securities have been issued through QBE's note issuance programme and are its direct, unsecured and subordinated obligations. The notes have a maturity period of 16 years, and are callable after six years. The net proceeds will be used for general corporate purposes within the group. Key Rating Drivers The subordinated securities are rated two notches below QBE's Issuer Default Rating, comprising two notches for 'Poor' baseline recoveries and zero for 'Minimal' non-performance risk. The notching for 'Poor' recoveries reflects our assumptions for subordinated debt issued at a holding company as per our criteria; should the company be wound up, the issuer's payment obligations under the securities rank behind all senior creditors but ahead of ordinary shares and additional Tier-1 (AT1) securities. The notes contain an optional interest deferral feature based on issuer discretion and would be converted to equity in part or in full should the Australian Prudential (LON:PRU) Regulation Authority (APRA) deem that QBE would become non-viable without conversion or a public-sector capital injection. The notes would be written off in part or in full were QBE unable to convert the notes to equity within five business days of the trigger event date. Fitch does not think that APRA would activate the non-viability trigger unless the event was sustained and would lead to QBE's non-viability. We regard these features as having 'Minimal' non-performance risk and we have therefore not applied additional notching as per our criteria. QBE has obtained APRA's approval for the new issuance to qualify as Tier-2 capital for regulatory capital purposes. The notes will receive 100% equity credit in Fitch's Prism Factor-Based Model, due to the application of the agency's regulatory override, subject to 100% regulatory capital recognition. However, given that the notes are a dated instrument, they will be treated as 100% debt in Fitch's financial leverage ratio calculation. Fitch expects QBE's financial leverage ratio (FLR) to be commensurate with its rating category after the issue of the securities, while its fixed-charge coverage ratio is expected to remain weak for its rating category. We estimate QBE's Fitch-calculated FLR to be below 30% post the debt issue. QBE made a net loss of USD712 million in the six months ending 30 June 2020 (1H20), mainly due to the underwriting and investment market impact caused by COVID-19. The group expects further pandemic-related net claims of USD265 million over the next 12-18 months. In response, QBE strengthened its balance sheet in 1H20 by raising USD813 million of equity and USD500 million of AT1 securities, and also by de-risking its investment portfolio and improving reinsurance protection. RATING SENSITIVITIES The rating on the securities will move in tandem with QBE's IDR. QBE's ratings remain sensitive to any material change in Fitch's pandemic-related rating-case assumptions. Periodic updates to our assumptions are possible in light of the rapid pace of change in government action in response to the pandemic, and the pace with which new information is available on the medical aspects of the outbreak. Factors that could, individually or collectively, lead to negative rating action/downgrade: - An adverse change in Fitch's rating assumptions on the pandemic impact, including assumptions relating to the Australian mortgage market. - Continued deterioration in QBE's underwriting and financial performance, with a combined ratio consistently above 100% (2019: 100%). - Prescribed capital amount coverage ratio below 1.50x (end-2019: 1.71x) and Fitch Prism model score below 'Very Strong' on a prolonged basis (end-2019: 'Very Strong'). - Fitch-calculated financial leverage ratio above 30% (end-2019: 24%) on a prolonged basis. - Significant worsening in QBE's business profile, as evidenced from a loss of market share and franchise. Factors that could, individually or collectively, lead to positive rating action/upgrade: - A positive change in Fitch's rating assumptions on the pandemic impact. - Positive rating action is prefaced by Fitch's ability to reliably forecast the impact of the pandemic on the financial profile of both the Australian non-life sector and QBE. - Sustained improvement in group financial fundamentals, with net income return on equity consistently above 10% (2019: 7%) and a combined ratio consistently below 98%. - Fitch-calculated financial leverage ratio below 23% and fixed-charge coverage ratio above 9.0x (2019: 4.8x) on a prolonged basis. - Fitch Prism model score of 'Very Strong'. ESG CONSIDERATIONS The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. 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. QBE Insurance Group Limited ----subordinated; Long Term Rating; New Rating; BBB Contacts: Primary Rating Analyst Kanishka de Silva, CFA Associate Director +61 2 8256 0367 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst Siew Wai Wan, Senior Director +65 6796 7217 Committee Chairperson Jeffrey Liew, Senior Director +852 2263 9939 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Criteria (pub. 02 Mar 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10112692) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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