QBE warns of $1.2bn FY 2017 loss

Australia’s QBE has warned the markets that it expects to report a full year 2017 after tax loss of around $1.2 billion due to catastrophe losses, reserve strengthening and write-downs.

The insurance group expects a combined operating ratio (COR) of around 104 percent for the full year 2017, exceeding the target COR range of 100 - 102 percent.

QBE experienced “significant” catastrophe activity in the fourth quarter of 2017, including California wildfires and December storms in Australia, coupled with some adverse development of Hurricane Maria. These added around $130 million to the net cost of catastrophes.

After a review of year end claims reserves, QBE has strengthened claims provisions by around $110 million, primarily in North America and Asia Pacific, (largely Hong Kong workers’ compensation). This compares with previous expectations of a “modest 2H17 release”.

Other smaller items, including weather-related attritional claims in North America, second half deterioration in Asia Pacific and a slightly higher expense ratio further contributed to a higher COR.

Two significant one-off, non-cash items added to the full year after tax loss.

Furthermore, QBE has revised assumptions used to support the carrying value of North American goodwill resulting in an impairment charge of around $700 million. This primarily reflects an increase in the long term combined ratio assumption for North America in the updated business plans.

The reduction in the US corporate tax rate to 21 percent has given rise to a $230 million write down of the carrying value of deferred tax assets in our North American operations.

The significant catastrophe claims in Equator Re and the North American operations (where already significant deferred tax assets preclude recognition of further tax losses), have distorted the group’s effective tax rate such that the QBE will recognise a material tax expense despite incurring a pre-tax loss, according to the Jan. 23 press release.

“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,” said QBE CEO, Pat Regan.

“Over the last few months, I have been conducting a detailed review of our operations. We have some businesses with strong market positions that are performing well but we also have businesses that are underperforming. We have commenced a comprehensive program of work to improve both the level and consistency of performance. At the same time, we are conducting a strategic review of our Latin American Operations as we look to simplify the Group and reduce risk. I will give you more detail on these plans in conjunction with the release of our FY17 result detail on 26 February 2018”.

For 2018, QBE is targeting a COR in the range 95.0-97.5 percent. QBE will report its full year 2017 result on Feb. 26, 2018.

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