QBE Stumbles Into New Reset
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What is the start of a new year without news of a loss, write down or a problem somewhere in QBE’s empire - usually North America.
Yesterday we had yet another one, a biggie that was complicated by evidence from the company that it will be one of the few victims of the Trump tax cuts in the US.
We saw an announcement in October of last year linked to the impact of the Mexican earthquake and those three massive US hurricanes, Harvey, Irma and Maria. That was after one earlier in the year warning about problems in its emerging markets businesses,
Now with a new CEO from January 1 in the shape of former CFO, Pat Regan, there’s a massive clean out and ‘kitchen sinking’ - so much so that the company will report a loss of $US1.2 billion for all of 2017.
The final dividend is in trouble - a decision will be made when the full year figures are released late next month on February 26.
The expected loss for the 12 months to December 31 - which compares to 2016’s $US844 million profit - also reflects a $US700 million goodwill impairment against QBE's North American business and a $US230 million write down related to the cut in the US corporate tax rate.
Mr Regan also called out another poor performance by QBE’s emerging market operations, with a strategic review into its Latin American unit underway as the insurer looks to simplify and reduce risk.
He said he will update the market on his plans when QBE announces its results on February 26.
“This has been a challenging year for QBE, reflecting an unprecedented cost of catastrophes as well as the particularly disappointing deterioration in our emerging markets businesses,” Mr Regan said in something of an understatement.
QBE shares were 6%, lower at $9.965. They later drifted higher to end down 0.5% at $10.43 - investors are used to these shocks from QBE. The shares though have lost about 25% of their value since May.
In its interesting that the first move by Mr Regan started in the job at the start of this month has been to add to a string of profit downgrades over 2017, by writing down the carrying value of its North American business by $US700 million. The company warned in a statement that it expects its combined operating ratio (COR and the key measure of an insurance company’s ability to insure at a profit), a percentage of claims payouts against premium income, could rise to 104%, above the target COR range of 100-102%.
The rise from the previous estimate of around 100%-102% forecast in October was natural catastrophes including Californian fires in October through December and last month’s storms in Australia (especially Melbourne which has already hit Suncorp and forced it to put more money aside).
A ratio above 100% reflects underwriting that is unprofitable. Pre October QBE had a forecast for a COR of at the upper range of the then forecast 94.5%–96.0%. The outcome will be close to 10 percentage points higher - a massive miss. It also said it would bolster claims reserves by $US110 million, and flagged various smaller items that would further undermine earnings, including weather-related claims and higher than expected costs.
Mr Regan was announced as the replacement for previous boss John Neal in October, after a series of downgrades under Mr Neal triggered growing investor concerns over the insurer's performance.
Mr Regan said it had been a "challenging year" for QBE, and over the last few months he had been conducting a detailed review of its operations
Back in early October QBE said it would take a US$600 million (AU$766 million) hit to its annual earnings following the impact of the trio of storms and the earthquakes in Mexico.
For 2017 its allowance for large individual risk and catastrophe claims has been increased to $US1.75 billion. This included allowances for large individual risk and catastrophe claims in the fourth quarter, an increase of $US600 million. Looking to new year the outlook is similar to what it was a year ago. There is of course the review, especially of the Latin American businesses and any financial cost for that.
But the board says it is looking for a big improvement for its COR from the actual outcome for 2017 - The outlook for 2018 includes a target COR range of 95.0-97.5%3 and a target net investment return of around 2.5-3.0%. The COR is of course subject to the now usual weather proviso.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.