We have warned twice in the past month that QBE might be hit by the impact of those recent huge US hurricanes. And hit they have been, along with the impact of Cyclone Debbie in Australia in march and the recent Mexican earthquakes.
Yesterday investors got the bad news after the big insurer finally updated the market on the impact and the shares sold off in the wake of the news of a massive hit to 2017 earnings that could in fact consume much of this year’s expected profit.
The shares fell more than 3% after the company admitted that pre tax earnings would take a $US600 ($A767 million) million hit which could mean the smallest of profits, or a small loss for the year to December, 2017.
The shares are down 29% since the 2017 peak of $13.58 in mid May. They fell 10% in a day after the release of its interim results on August 17, and yet yesterday’s update was far more dramatic than the recent six month results.The shares ended at $9.80 yesterday.
The sum of the claims to hit QBE from the recent disasters here and from the US and nearby regions in particular has burst through the insurer’s budget for large individual risk and catastrophe claims of $US1.15 billion, and the extra $US900 million it has in reinsurance cover.
Seeing the company earned a pre-tax profit in 2016 of $US1.072 billion and a pre-tax profit of $US422 million for the first half of 2017, QBE could quite easily report a loss for the full year.
The company’s combined operating ratio – an insurance sector measure of total operating result, earned premium income less the cost of claims and other charges (will rise to the range of 100% to 102.5% (100% or more can mean an underwriting loss, below means a profit).
In other words QBE is indicating a small loss for the year as a whole, to which we add investment returns and other income to offset the loss.
QBE had a combined ratio of 93.2% for all of 2016 and this had risen to 97.5% for the June half year and the company had forecast a ratio for the full year (when revealing its interim figures in August) in the range of 97.5% to 99%.
That could mean a second half loss and no final dividend – the company made no comment yesterday on the future of the final payout next February. It paid a final for 2016 of 22 cents a share.
QBE has a policy of paying out 60% of cash profits as dividends – the first half payout of 22 cents a share (up 5%) was equal to 61%.
Based on yesterday’s statement the chances of a final dividend are remote at this stage.
And the interim next year could very well be lower than this year’s 22 cents if the impact of the disasters spills over in 2018.
QBE increased its allowance for large individual risk and catastrophe claims to $US1.75 billion ($A2.2 billion) for 2017, following an impact on its business from hurricanes in the Atlantic and earthquakes in Mexico.
The total net cost of large individual risk and catastrophe claims was $US1.056 billion in 2015-16, and $US1.067 billion in the year before that.
The company expects a pre-tax impact of about $US600 million to its 2017 earnings, the company said in a statement on Tuesday. If sustained it could wipe out all pre-tax earnings from the second half and a bit more.
QBE said in the statement that:
"Given catastrophe losses to date, 2017 will likely prove to be the costliest year in the history of the global insurance industry. Cyclone Debbie in Australia earlier this year, Hurricanes Harvey, Irma and Maria which impacted the Gulf of Mexico, the Caribbean and Florida as well as the earthquakes in Mexico have all impacted QBE’s businesses.
"While there remains a high degree of uncertainty for the estimated cost of Harvey, Irma, Maria and the Mexican earthquakes, the Group has increased its 2017 allowance for large individual risk and catastrophe claims to $US1.75Bn including allowances for large individual risk and catastrophe claims in the fourth quarter of 2017. There is therefore a pre-tax impact to earnings of approximately $US600M.
"Reflecting the above, the Group’s 2017 combined operating ratio target range now moves to 100.0%-102.0%.
QBE’s Chief Executive Officer, Mr John Neal (who leaves at the end of the year, said in yesterday’s statement: “while it is too early to speculate how much reinsurance and primary insurance pricing will rise as a result of recent catastrophe experience, QBE is well placed to benefit from price rises with much of our reinsurance programs already purchased for 2018.”
Shaw Stockbroking analyst David Spotswood estimated QBE is now on track to make a full-year profit of about $US160 million – down from $US844 million last year.
"They are going into losses in the second half," Mr Spotswood said. “ he issue will be is it a one-off for the P&L [profit and loss] and the balance sheet for this year?"
The downgrade has occurred before the next chief executive, Pat Regan replaces the departing outgoing Mr Neal at the start of 2018.
