By Caroline Henshaw
SYDNEY--QBE Insurance Group Ltd. (QBE.AU) may face further
pressure on its credit rating after the Australian insurer spooked
markets this week with the second profit warning this year,
according Moody's Investor Service.
In a phone interview from New York, Alan Murray, a senior vice
president of Moody's, said QBE's latest profit warning also
highlighted the volatile nature of the U.S. business.
"Obviously, there's a credit negative aspect to the news," said
Mr. Murray, who put QBE under negative review earlier this
year.
QBE shares plunged to their lowest level this year on Monday
after the company warned that U.S. superstorm Sandy would cost up
to US$450 million and force it to raise half a billion dollars in
order to shore up its balance sheet.
The insurer, which earns about a third of its income from the
U.S., now expects annual net profit of more than US$1 billion this
calendar year--around 40% less than the analyst consensus prior to
the warning.
The profit downgrade, along with which QBE said it would put
aside millions of dollars in reserves to cover potential losses,
prompted Standard & Poor's to place the insurer on negative
outlook, owing to concern the QBE's capital position would be
"deficient" this year.
It also triggered a wave of downgrades from equity analysts who
questioned whether QBE would be able to maintain its margins in
2013.
"Competitive pricing, catastrophe losses, crop weather-related
losses... each of these touches on an aspect of our negative
outlook," Moody's Mr. Murray said in the interview.
It is the second time this year that QBE has surprised the
market by cutting its profit expectations. In January, the company
said a string of natural disasters--including floods in Thailand,
the New Zealand earthquake, and Melbourne hailstorms--could as much
as halve profit in the 2011 calendar year, which coincides with its
financial-reporting period.
Mr. Murray said the aggressive expansion strategy pursued by
former Chief Executive Frank O'Halloran, who completed more than
100 deals around the world during his 14-year tenure before
stepping down in August, left QBE with "more diverse sources of
earnings and operations, but also more diverse exposures."
In 2011, a record year for global disasters affecting the
insurance industry, the company faced US$2.36 billion of combined
catastrophe and large single-risk losses.
To help shore up its balance sheet, new Group Chief Executive
Officer John Neal on Monday said that QBE planned to issue, and had
received commitments for, US$500 million worth of subordinated
convertible debt, subject to regulatory approval.
Morgan Stanley analyst Daniel Toohey said the raising would take
QBE to the upper end of its 30%-40% leverage target range, adding
to a debt pile that many analysts argue is already too large.
Mr. Murray described QBE's leverage profile as a "key credit
challenge" when he put the insurer on negative watch in May,
arguing it would need to lower its ratio to 30% or less on a
nominal basis to push its rating higher.
Write to Caroline Henshaw at caroline.henshaw@wsj.com
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