November 9, 2017 / 2:00 AM / a year ago

Fitch Rates QBE's Proposed Perpetual Capital Notes 'BBB-(EXP)'

(The following statement was released by the rating agency) SINGAPORE, November 08 (Fitch) Fitch Ratings has assigned an expected rating of 'BBB-(EXP)' to QBE Insurance Group Limited's (QBE; A-/Positive) regulatory compliant Additional Tier 1 perpetual capital notes. The perpetual securities will be QBE's direct, unsecured and subordinated obligations. Net proceeds will be used to finance gender equality-aligned assets in accordance with QBE's Gender Equality Bond Framework. The final rating is contingent on the receipt of final documents conforming to information already received. KEY RATING DRIVERS The proposed Additional Tier 1 notes are rated three notches below the holding company's IDR of 'A-': two notches for Fitch's assumption of 'poor' recovery prospects in the event of a default, given the level of subordination, and one notch for non-performance risk, as Fitch views this risk as 'moderate' under the agency's criteria. Interest payments are non-cumulative and management has the right to cancel payments, in whole but not in part, at its discretion. The notes would be written off or converted to equity in part or in full should the Australian Prudential Regulation Authority (APRA) deem that QBE would become non-viable without conversion or without a public-sector capital injection. Fitch considers that APRA is unlikely to activate the non-viability trigger unless the event in question was a sustained one that would lead to QBE's non-viability. In terms of management's discretion to cancel payments, Fitch believes that the management is more likely to cancel payments for Additional Tier 1 notes compared with other Tier 2 securities with similar cancellation triggers, and thus the former have greater non-performance risks. Under Fitch's methodology, the notes will be given 100% equity credit in the calculation of Fitch's capital adequacy ratio. The notes will be treated as 0% debt in financial leverage ratios, given that these instruments are akin to deeply subordinated debt that have the key features of perpetual preferred securities, including permanence and having deferrable coupons that are non-cumulative. Fitch estimates QBE's leverage will be below 25% after this issuance. This is stronger than the median score of 28% for 'A' rated issuers based on Fitch's methodology. RATING SENSITIVITIES QBE's subordinated debt ratings are broadly sensitive to the same considerations that might affect the group's IDR. Key upgrade rating triggers include: - Combined ratio consistently below 95% (2016: 94%) - Coverage of the regulatory prescribed capital amount (PCA) of above 1.7x for a prolonged period and its capital, as measured by Fitch's Prism Factor-Based Capital Model (FBM), reaching 'Very Strong' levels (2016 PCA: 1.76x; FBM Score: 'Strong') - Consistently favourable financial leverage ratio, sound market franchise and sustainable premium base. Key downgrade rating triggers include: - Increased impetus by APRA in activating the non-viability trigger for this Additional Tier 1 issuance - Deterioration in its financial fundamentals, such as significant weakness in the business profile leading to loss of market share and franchise - A combined ratio above 100%; - PCA coverage of below 1.5x on a prolonged basis - Financial leverage of above 30% (2016: 23%) and fixed-charge coverage ratio of consistently below 4x (2016: 5x). Contact: Primary Analyst Wan Siew Wai Senior Director +65 6796 7217 Fitch Ratings Singapore Pte Ltd. One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Christopher Han Associate Director +65 6796 7224 Committee Chairperson Jeffrey Liew Senior Director +852 2263 9939 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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