QBE flags profit risk amid catastrophe claims blowout

Listed insurer QBE has warned of a $150m catastrophe claims blowout, as it tweaks its customer book to meet inflationary pressures.

Listed insurer QBE has warned of a $150m catastrophe claims blowout, as it tweaks its customer book to meet inflationary pressures. Picture: Dean Marzolla

QBE has flagged new profit risks and says it is likely to exceed its catastrophe budget, but it will release pandemic provisions to bulk up its balance sheet as it also lifts costs to meet inflation and dumps high-risk customers.

QBE, which has exposure to most major insurance markets, said it was grappling with elevated catastrophe activities across its book, which are forecast to blow out by around $US100m ($150m) this year.

QBE said based on the catastrophic claims it now expected its net costs to land around $1.06bn for the year, up from its initial $962m allowance.

The insurer had reported net cost of catastrophe claims tracking at $US430m in the second half of the financial year through to October. However, to keep in its allowance, QBE’s catastrophe claims in November and December must stay within the insurer’s $180m remaining limit.

The blowout comes as residents start returning to flood-inundated properties throughout NSW’s central west and high waters continue to make their way down the Murray Darling Basin.

The Insurance Council reported 2175 claims related to the floods had been lodged.

Total net cost of catastrophe claims for the 10 months through October are sitting near $US880m, in a figure worsened by the Russian invasion of Ukraine. QBE booked a $US75m charge after the invasion of Ukraine, linked to insurance written to private planes.

The insurer said the higher catastrophe claims had introduced “some risk to our original full year outlook”. But QBE still maintained its existing profit forecast, tipping its operating ratio – excluding the impact of its Australian pricing promise – to come in around 94 per cent in the full year.

Earlier this month, Suncorp said it had used half its total natural catastrophe budget – or some $530m – for the entire financial year by the end of October.

Jarden analyst Kieren Chidgey lifted the investment bank’s expectations for QBE’s combined operating ratio on the back of the market update to 93 per cent. This was up on the 92.5 per cent Jarden had previously pegged, noting QBE was a “highly compelling” investment and premium growth was tracking ahead of guidance.

QBE also kept its forecast for constant currency growth to land at around 10 per cent for the full year, flagging it expected the “supportive premium rate environment” would likely continue into next year.

The insurer said it was responding to the price pressure by pushing up costs or matching inflation across its books and dumping high risk customers.

In a note to clients last week, Credit Suisse broker Doron Kur and Supun Wijerathna said there were short term margin pressures for the insurance sector, but some signs of “hope”. “On a positive note, early signs of some moderation suggest we could see claims inflation plateau within the next year,” they wrote. “Short term risks are, however, top the upside owing to labour market pressure.”

“Insurers will need to continue putting through robust premium rate increases,” they added. “With (year-on-year) claims inflation continuing to climb, insurers face ongoing margin headwinds.”

In a trading update on Monday, QBE said its gross written premium for the 10 months through October was up 6 per cent on the prior corresponding period, or 13 per cent on a constant currency measure. The insurer reported its renewal rate was up 8.4 per cent, as higher prices flowed through to customers rolling over their cover.

QBE said despite the pricing pressures retention of customers had remained “at favourable levels”. The insurer reported its North American market was running hottest, with a 9.8 per cent lift in premium retention.

QBE said while claims inflation was high, it was tracking at expected levels outlined in the insurer’s first half results.

“QBE continues to achieve rate increases at or above inflation in most classes … 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.”

However, QBE said it would seek to compensate for the inflationary impact by unwinding pandemic provisions after the recent High Court decision in Australia which clarified which customers may seek to make claims for Covid-19 related losses.

QBE closed 7c, or 0.6 per cent, lower on Monday at $12.33. Its shares have risen 3.4 per cent since December 31.

Originally published as QBE flags profit risk amid catastrophe claims blowout