Storm-hit QBE Flags Retreat After Losses

January 23, 2018 - New QBE Insurance boss Pat Regan is set to unwind decades of global expansion, flagging the sale of large swathes of the underwriter, as he warned of a $1.2 billion annual loss.

Presiding over his first downgrade as chief executive, Mr Regan said the cost of recent wildfires in California and a string of severe storms in Australia last month would be enough to push the insurer further into the red than previously thought.

QBE has been a source of disappointments for investors in recent years. It was only in October that QBE warned it was on track for an operating loss after the costliest year in the history of the global insurance industry took its toll.

A prior earnings downgrade in June came just ahead of the groups half-yearly results, caused by a small claims blowout in Latin America and Asia. QBE, which operates in 38 countries, at the time said it would be selling a number of business in its South American arm.

The group also kicked off the year with a surprise $160 million blowout after the British government overhauled its workers compensation awards. The Trump administrations corporate tax rate cut resulted in a $230m writedown on the groups deferred tax assets.

Mr Regan was coy on which businesses would be announced for sale when the company reports its full-year loss next month, but said the group needed consistent standards in underwriting and actuarial pricing.

Sometimes it’s harder to do that in smaller countries, Mr Regan said. The pools of underwriting talent you get in Sydney and London are less available in smaller markets. That’s probably true in Latin America. He said QBE was looking at all options for its Latin American businesses. I can’t give you any more detail at this stage. We will come back to it in February Mr Regan, formerly QBEs chief financial officer and head of Australia, took over from previous boss John Neal following a boardroom scandal and a string of profit downgrades.

Were implementing a comprehensive plan to simplify the group’s performance, Mr Regan said.

Mr Regan said the group would also be writing less high hazard risk policies in Asia, although it would be sticking with businesses in Hong Kong and Singapore.

Only the Australian and European businesses are expected to report an underwriting profit. The North American, Asian and Latin American divisions were all loss-making over the last year.

Mr Regan said the company would be smaller, a little bit less complex and more focused and that the groups focus was on hitting its profit guidance for the coming year. To do this, he said the company would be investing more in underwriting and data collection.

Mr Regan also lowered the company’s expectations for the coming year. Although QBE shares initially plunged 5 per cent in morning trade following the news, the stock recovered to close just 0.6 per cent lower at $10.43, well below last year’s high at $13.50.

That the share price has barely changed today after the most recent downgrade says much about the continuing hope of those who are immune to overwhelming evidence, Velocity Trade analyst Brett Le Mesurier said.

Hope is a basic instinct of humanity, but it won’t feed the kids. Cyclone Debbie, which hit Queensland in March, the recent hurricanes Harvey, Irma and Maria, which devastated the Caribbean, Texas and Florida, an earthquake in central Mexico and other disasters have punished the insurance industry.

Global reinsurer Munich Re reckons insured global losses from natural and man-made catastrophes last year exceed $170bn, well above the average of the past decade.

The fact that QBE had such a large overrun on its catastrophe and large claims expense for the year suggests that it did not buy enough reinsurance, Mr Le Mesurier said.

This indicates that the insurance profit guidance was probably always a stretch target, so they needed to be lucky with the weather and they weren’t. Mr Regan said QBEs reinsurance program was in place for the current year, but said it could be reviewed in the future.

He also said the group retained the same auditor for its prior-year reserve release levels, which releases profit from years of benign claims experiences.

A rise in natural disasters in the final quarter of last year added about $US130m to costs, QBE said.

The company said it had strengthened claims provisions by about $US110m ($138m), primarily in North America and the Asia-Pacific region, where it had previously forecast a modest second-half release of funding. The significant catastrophe claims in Equator Re and QBE’s North American operations has distorted the overall effective tax rate, and the company said it would recognise a material tax expense despite expectations of a loss.