It couldn’t last – QBE’s period of no profit downgrades lasted for a year until yesterday when it revealed a nasty little surprise in the US.
Thanks to unfavourably wet weather conditions in the US for much of this year, QBE has downgraded its profit guidance for the current financial year which ends on December 31.
The poor weather will see the company’s US crop insurance business reporting a combined operating ratio – which is claims other expenses set against total premiums of 107% to 109%.
Because it is a key measure of profitability, a combined ratio above 100% indicates a loss. That means the crop insurance business will trade at a loss and that in turn means lower results for QBE as a whole.
QBE told the ASX that due to prevented planting claims, and yield shortfalls as a result of recently adverse weather conditions (including an unusually cool growing season and heightened crop-hail), QBE’s North American Crop insurance business is now expected to report a 2019 current accident year combined operating ratio of around 107% – 109% on net earned premium of nearly $US1.2bn billion.
“This compares with the reported HY2019 combined operating ratio of 98% for this business and the 10-year historical average combined operating ratio of around 90%.
“The adverse weather conditions are also anticipated to contribute to slightly elevated attritional loss experience in some of our North American property classes,” QBE said.
On top of that QBE said other parts of the US had also experienced higher than expected claims, which will add to the higher combined ratio.
QBE said this means the combined operating ratio across the entire group “could be slightly above” its previous guidance of 94.5% to 96.5%.
Against this, QBE premium rates had risen over the year and it now expects a better combined operating ratio of 93.5% to 95.5% in the year to December 2020.
QBE said it still expects its investment returns to meet forecasts – “QBE’s investment performance remains on track to report a net investment return towards the upper end of our 2019 target range of 3.0% – 3.5%.”
But the company warned that 2020 will see QBE reporting a 2020 net investment return target range of 2.5% – 3.0%, down from this year’s 3.0% – 3.5% “reflecting lower global risk-free rates,” the company said on Wednesday.
QBE will report its full-year profits for 2019 in late February.
