TEXT-S&P: Outlooks On QBELMI And QBELMI Asia Revised To Negative

Mon Nov 12, 2012 1:14am EST

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(The following was released by the rating agency) Overview

-- The outlooks on QBE Lenders' Mortgage Insurance Ltd. (QBELMI; AA-/Negative) and its subsidiary, QBE Mortgage Insurance (Asia) Ltd. (QBELMI Asia; AA-/Negative), have been revised to negative following the change in outlook on their ultimate parent, QBE Insurance Group Ltd. (QBE; core operating entities rated A+/Negative) to negative.

-- As previously stated, we have a one notch rating-differential tolerance between the stronger-rated QBELMI and QBE's core operating entities.

Given the current one notch rating-differential, any adverse rating action on QBE therefore has implications for the ratings and outlook on QBELMI.

-- The ratings on QBELMI Asia are equalized with the ratings on QBELMI, largely because of a net-worth maintenance agreement in place supporting QBELMI Asia's capitalization.

Rating Action On Nov. 12, 2012, Standard & Poor's Ratings Services revised its outlooks on QBE Lenders' Mortgage Insurance Ltd. (QBELMI) and QBE Mortgage Insurance (Asia) Ltd. (QBELMI Asia) to negative, and affirmed the 'AA-' financial strength and issuer credit ratings on both entities.

Rationale The outlooks on Australian-based QBELMI and its subsidiary, Hong Kong-based QBELMI Asia, have been revised to negative following the change in outlook on their ultimate parent, QBE Insurance Group Ltd. (QBE; core operating entities rated A+/Negative) to negative (see Research Update: Outlook On QBE Insurance Group Entities Revised To Negative From Stable; Ratings Affirmed).

As previously stated, we have a one notch rating-differential tolerance between the stronger-rated QBELMI and QBE's core operating entities.

Given the current one notch rating-differential, any adverse rating action on QBE therefore has implications for the ratings and outlook on QBELMI. The ratings on QBELMI Asia are equalized with the ratings on QBELMI, largely because of a net-worth maintenance agreement in place supporting QBELMI Asia's capitalization.

We note that QBELMI does not benefit from the same degree of rating-differential tolerance as its closest peer, Genworth Financial Mortgage Insurance Pty Ltd. (Genworth Australia; AA-/Negative), due to QBELMI's relative greater integration with, and reliance on its parent (see Research Update: Outlook On Genworth Australia Revised To Negative Following Downgrade Of Genworth Group's Core Life Insurance Companies, Oct. 11, 2012).

We view QBELMI as strategically important to the QBE Group, as it forms a material part of the Australian-based group's global multi-line, non-life insurance operations. QBELMI represents about 10% of consolidated group shareholders' equity, and contributes a solid dividend stream to the group.

We also consider QBELMI to be operationally integrated within the group, benefiting from QBE Group's actuarial, risk, and investment management expertise. Furthermore, QBELMI is reliant on the group for the provision of internal reinsurance and financial flexibility.

We believe that on a stand-alone basis, QBELMI continues to meet several business and financial measures supportive of its higher ratings than its parent. The company also has protection against financial deterioration at the group level.

This is due to several factors, including: robust prudential supervision by the Australian Prudential Regulation Authority (APRA); presence of independent board members; strong depth of experience and operational expertise of management; and a considered dividend policy.

In addition, there remains a strong economic incentive to maintain the 'AA-' ratings on QBELMI to support the insurer's business model and value proposition. We note that the change in outlook does not indicate a change in our view of QBELMI's very strong capitalization and stand-alone credit profile. In our opinion, QBELMI's very strong risk-based capitalization should enable the company to absorb a significant level of claims if Australia were to experience a severe economic downturn. Based on Standard & Poor's Australian lenders' mortgage insurance capital model, the company's capitalization was scored at the 'AA' category level at June 30, 2012.

Inputs to our capital model assessment included approximately A$1.1 billion in shareholders' equity, A$0.6 billion in unearned premium reserves, as well as reinsurance cover to fund claims. Further supporting the company's capitalization are its conservative financial structure and reserving practices, adequate reinsurance arrangements, and strong financial flexibility.

Outlook The negative outlooks on QBELMI and QBELMI Asia reflect our negative outlook on their ultimate parent, QBE. We have a one notch rating-differential tolerance between the stronger-rated QBELMI and QBE's core operating entities. Any adverse rating action on QBE therefore has implications for the ratings and outlook on QBELMI. The ratings on QBELMI Asia are equalized with the ratings on QBELMI, largely because of a net-worth maintenance agreement in place supporting QBELMI Asia's capitalization.

The outlooks on QBELMI and QBELMI Asia would likely be revised back to stable if the outlook on QBE is revised back to stable.

Downward ratings pressure could occur if:

-- There is a further adverse rating action on QBE, noting that if the ratings on QBE were lowered, it would not likely trigger an automatic downgrade of QBELMI, but would trigger a review of the ratings; or

-- The company's Standard & Poor's capital model score fell below the 'AA' category level--which we envisage could occur as a result of deteriorating economic conditions or a change in QBELMI's capital strategy; or

-- Operating performance negatively deviates from our expectations or points to a structural deterioration in earnings; or

-- QBELMI lost its major clients, resulting in significant loss of market share. Related Criteria And Research

-- Research Update: Outlook On QBE Insurance Group Entities Revised To Negative From Stable; Ratings Affirmed -- Research Update: Outlook On Genworth Australia Revised To Negative Following Downgrade Of Genworth Group's Core Life Insurance Companies, Oct. 11, 2012

-- Full Analysis: QBE Lenders' Mortgage Insurance Pty Ltd., September 19, 2012

-- Australian LMI Industry Likely To Shrug Off An Economic Downturn, April 16, 2012

-- Australian Lenders' Mortgage Insurance Capital Model, published Aug. 16, 2010

-- Group Methodology, published April 22, 2009 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From QBE Lenders' Mortgage Insurance Ltd. QBE Mortgage Insurance (Asia) Ltd. Counterparty Credit Rating Local Currency AA-/Negative/-- AA-/Stable/-- Financial Strength Rating Local Currency AA-/Negative/-- AA-/Stable/--

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