Moody's affirms QBE rating

Moody's Investors Service has affirmed its A3 issuer rating of QBE Insurance Group following the company's announcement of five acquisitions.

At the same time, Moody's maintains a stable outlook on all of QBE's ratings except QBE Lenders' Mortgage Insurance Limited (QMI Australia). The outlook on QMI Australia remains negative.

According to QBE, it has reached agreements to acquire ZC Sterling Corporation, a US-based underwriting agency, for an up-front payment of US$575 million, three other underwriting agencies in the US and Europe, and a renewal rights portfolio in the US.

The initial purchase price for all five acquisitions is about US$695 million.

"The affirmation of QBE's ratings with a stable outlook is based on the fact that it has successfully completed an accelerated institutional placement of 97.6 million ordinary shares at A$20.5 per share to raise A$2 billion of new capital to fund the acquisitions, and the purchases would not materially impact its financial leverage, which is likely to remain in the low 30% range," says Wing Chew, Moody's vice president/ senior analyst.

"Moreover, the acquisitions are expected to add gross written premium of US$525 million and after-tax profit of about US$175 million in their first full year under QBE," says Chew, who is also Moody's lead analyst for QBE.

"The structure of the acquisition of ZCS -- the largest purchase -- also includes additional incentive payments, subject to realization of earnings over the next 2 years," says Chew.

Further, Moody's believes that if the capital-raising plan goes through, the acquisitions would not materially impact QBE's capitalization, given the continued strengthening of the latter over the past few years, due in turn to its strong underwriting performance.

However, Moody's considers that negative rating pressure would arise if QBE proceeds with further large acquisitions, in the absence of additional capital for support, resulting thereby in a significant deterioration in its capitalization.