QBE puts market on notice re earnings headwinds

Company News

by Glenn Dyer

Global insurer QBE (ASX:QBE) has warned that it faces a continuation of what it calls “challenging operating conditions” as it heads towards the end of its full financial year on December 31.

In a trading update to the ASX yesterday which hinted at a weaker than expected full year outcome, QBE said these conditions had “persisted into the second half, and while performance remains resilient across many facets of our business, higher than expected catastrophe costs have introduced some risk to our original full year outlook.”

QBE said it expects the full-year cost of catastrophe claims to exceed annual allowance by about $US100 million after heavy rain again inundated parts of Australia’s eastern states and Hurricane Ian wreaked havoc in parts of Florida and other southern US states.

The company told the ASX in the update that the net cost of catastrophe claims for the nine months through September was tracking at about $US880 million.

It said it now assumes full-year net catastrophe costs of about $US1.06 billion, compared with a $962 million allowance for the 2022 financial year to December 31.

The total includes an unchanged $US75 million charge for exposure to the conflict in Ukraine.

QBE said that gross written premium for the three months through September was up 6% on-year, or 13% in constant-currency terms and it It continued to expect gross written premium to grow by about 10% in constant-currency terms over the whole of 2022.

“Based on our assessment of underwriting performance to date, we now expect a FY22 Group combined operating ratio of around 94% which is around the estimate given with the interim results forecast in August.

As outlined at the 1H22 result, QBE’s FY22 combined ratio outlook excludes the impact of the Australian pricing promise review,” QBE said.

The group said it had achieved rate increases at inflation or above in most classes and anticipated that the favourable rate environment would persist into 2023.

Despite aggressive central bank action over recent months, risks associated with the persistency of inflation remain elevated, and QBE expects to strengthen long tail reserves in the second half to build resilience for a more prolonged inflationary environment.

The impact will be broadly offset by the release of COVID risk margin, where residual risk associated with COVID business interruption claims has reduced following recent legal decisions.

“North America Crop insurance in 2022 has proven relatively resilient in a season characterised by a number of headwinds, including preventive planting, drought impacts, and damage from Hurricane Ian. Based on available data, QBE’s current estimate is for a FY22 Crop combined operating ratio of around 96%,” QBE said.

“While financial market volatility has persisted into the second half, both risk asset and credit performance has remained sound. Interest rates have continued to increase across our key markets, resulting in a negative asset risk free rate impact of $461 million in 3Q22, which was broadly offset by a beneficial claims liability discount impact of $413 million.”

QBE shares eased half a per cent to $12.33.

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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