Moody's Downgrades QBE's Debt Ratings After Insurer Warns of Losses

The market value of QBE Insurance Group dropped by some $5 billion after yesterday’s actions by Moody’s Investment Services related to the company’s expected 2013 net losses of some $250 million, according to news reports.

Moody’s reduced QBE’s issuer and senior unsecured debt ratings to Baa2 from Baa1, following Monday’s announcement by QBE in which the Australia-based property and casualty firm reported the expected losses related to the writedown of intangible assets of some $930 million, and additions to reserves and risk margins of some $670 million.

QBE had noted it incurred unexpectedly large claims after weak crop prices hit its U.S. operations.

The company declined to comment.

Pessimism continued to drive down QBE shares on Tuesday, according to the Sydney Morning Herald, taking the total decline in its shares since it forecast the loss to 30%.

The Sydney Morning Herald reported that this was QBE’s the third profit downgrade from chief executive John Neal in 12 months.

QBE has completed more than 75 acquisitions in the past 10 years to expand to 50 countries, but has grappled with hefty claims from at least one major market for each of the past few years. QBE said it was putting aside more money for claims made a year earlier for workers’ compensation and construction defect risks, among others, while its North American crop-insurance business had also suffered.

QBE, which generates about 30% of its revenue from North America, posted a net profit of $761 million for 2012; the company has said it has already put in place a new executive team for the region.

Moody’s noted that QBE’s Belinda Hutchinson, a director for 16 years, would step down as chair in March 2014 and would be replaced by board member Marty Becker.

According to Moody's, the downgrade “reflects the group's weakened profitability, internal capital generation and debt service coverage measures,” as well as the “likelihood of lower prospective profitability from the group's North American operations.”

Moody's noted that the writedown of all of the intangible assets associated with QBE's lender-placed insurance business primarily reflects the material and rapid contraction of revenue for this segment, with gross premiums written expected to fall to $960 million in 2013 from nearly $1.6 billion 2012, a figure management expects to decline further in 2014 to approximately $800 million.

Moody’s stated that the outlook for the ratings is stable, reflecting its expectations that QBE should be “less susceptible to operational volatility going forward and more likely to remain within tolerances at the new rating level.” The outlook also considers Moody's expectations that QBE's profitability will strengthen in 2014, “despite continued headwinds for the North American operations, and that the group will restore capital strength and deleverage its balance sheet over time, through both retained earnings and capital management actions.”

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