QBE Warns On Profit “Headwind”

QBE Insurance shares took a bit of a hit yesterday after it released a strategy update that confused some investors.

QBE’s statement seemed to tell the market that earnings in 2019 might be a touch weaker than analysts and investors had been working on.

For example CEO, Pat Regan indicated that profits will face a “headwind” of $US50 million to $US100 million in 2019 after it increased its allowance for large individual risk and catastrophe claims.

“Notwithstanding the resulting headwind of around $50M-$100M, we remain confident of achieving an improved combined operating ratio and higher overall profitability in 2019 compared with 2018, underpinned by the premium rate increases we are achieving, expected ongoing improvement in the Group’s attritional claims ratio and the recently commenced efficiency program,” he said.

But the company tried to offset any concerns that news might have by forecasting that its underwriting profitability would still improve in 2019 compared with this year.

And to confuse people still, QBE revealed what seems now to be commonplace at the global reinsurer and insurer – another round of cost-cutting which will see it strip out a net $130 million from its expenses by 2021.

In Tuesday’s update, QBE also revealed a new reinsurance program, which it said would increase the company’s protection against catastrophic events, such as major cyclones or hurricanes. That will see its budget for large individual risk and catastrophe claims rise from $1.2 billion to $1.4 billion.

CEO Regan characterised the impact of the changes on its profits in 2019 as a “small P&L headwind” and said he was comfortable with the group’s performance for the 2018 year, and there was no change in its guidance for year.

Phrases like ‘profit headwind’ worry investors who expect the worse – lower profits – which is why QBE shares were down 9% at the open, but pulled back to be down 4.1% at $9.96.

To illustrate the impact of the new reinsurance program, QBE said its probable losses in a 1-in-20 year Australian cyclone would be lowered by 20%, while its losses under a 1-in-200 year cyclone would be cut by 35%.

“The 2019 program is expected to save around $125 million in reinsurance costs; however, this will be more than offset by an increase in the budgeted allowance for large individual risk and catastrophe claims to around $1.4 billion, up from around $1.2 billion currently, given greater variability around reinsurance recoveries,” the company said.

Mr Regan said there was a path towards “sustainable” return on equity in the double digits, as he also announced the final stage in its program to simplify the insurance.

QBE said it would sell its businesses in Puerto Rico, Indonesia, and the Philippines, which between them are were worth about $100 million in gross written premium a year.

The cost-cutting announced by QBE will include a rationalisation of its technology systems, greater automation, and a more “streamlined” operating structure in Australia that included an unspecified number of job cuts.

He said about a third of the cost cuts announced by QBE would come out of its North American business.

About Glenn Dyer

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.

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