S&P Affirms Two QBE Operating Units ‘A+’ Ratings

Standard & Poor’s Ratings Services announced that it has affirmed its ‘A+’ counterparty credit and financial strength ratings on Australia’s QBE Reinsurance Corp. (QBE Re) and QBE Insurance Corp. (QBEIC).

S&P noted that the ratings of both companies are based on the “explicit support from its ultimate parent company, QBE Insurance Group Ltd. (QBE Group).” QBEIC is viewed as core to its immediate parent company, QBE Re, which guarantees its policyholder obligations. QBE Re is in turn seen as a core operating unit of the QBE Group, which is also rated “A+” by S&P.

“The ratings also reflect QBE Re’s strategic role and significance to QBE Group, strong parental support, strong and growing business position in QBE the Americas (U.S. and Latin America), extremely strong capital base, and good and improving operating performance,” said S&P. “Offsetting these positive factors are the company’s increased use of retrocession, aggressive gross premium growth, and dependence on program business.”

S&P said it expects QBE Re “to generate good earnings in 2004 with an ROR of 5 perecent-10 percent as it continues to benefit from rate increases in most of its business lines. The company will organically grow its franchise in the U.S. and Latin American markets. Furthermore, it will leverage its existing good relationships with its program managers and brokers to strengthen its position in the U.S. market. In addition, it will continue to rely on the expertise of its local management in Brazil and Argentina to further establish its brand name in Latin America. The capital base should remain very strong because of anticipated good earnings and additional capital contributions from the QBE Group in 2004.”

S&P listed a number of “Major Rating Factors” for QBE Re, including the, strategic role and significance to its parent, a “strong parental commitment,” its strong and growing business position, extremely strong capital adequacy ratio (184 percent), and a “good and improving operating performance.”

Commenting on the company’s increased use of retrocession, S&P noted that its reinsurance utilization ratio increased considerably to 46 percent in 2003 from 29 percent in 2002.”

Other factors noted in the announcement included aggressive gross premium growth and a dependence on program business. “The company relies significantly on its affiliate QBEIC to produce more than half of its reinsurance business, which is written through program managers,” S&P noted. “Program writing has been problematic for many companies, resulting in the failure of certain players and the withdrawal of others from this segment. To mitigate some of the inherent risks associated with the program business, QBE the Americas has established a rigorous program selection, due diligence, and monitoring process to ensure frequent audits (underwriting, claims, accounting, and actuarial) and that control systems in place are respected.”

Commenting on QBEIC’s rating S&P also noted the strong commitments from the parent companies that express “both explicit and implicit support,” the unit’s “extremely strong capital base, and good operating performance. Offsetting these positive factors are the company’s dependence on program business, a large jump in 1-in-100 and 1-in-250 year event gross hurricane probable maximum loss (PML), and aggressive premium growth.”

S&P said it expects QBEIC “will grow organically through its existing program managers and may opportunistically add new programs to its portfolio, but the company is capping its growth at a manageable 25 programs. In addition, QBEIC is expected to generate a combined ratio of 90 to 95 percent in 2004, while maintaining its superior capital base.”

The “Major Rating Factors” noted by S&P largely coincided with those it expressed concerning QBE Re. The full reports on both companies are available to the public on the S&P Web Site at: http://www.standardandpoors.com.