Climate a material risk, says QBE as profit rises 41%

Insurer QBE has begun adjusting its models to factor in climate change, saying insurance may become unafforable for some areas.

Picture: Bloomberg

Insurer QBE has begun adjusting its catastrophe models to factor in the expected effects of climate change out to 2100 and warned climate posed a material risk to its business as it posted a 41 per cent lift in net profit for the year.

For the 12 months to December 31, QBE net income rose to $US550m, well below market expectations, as chief executive Pat Regan flagged the insurer was entering 2020 “with strong prospects for further sustainable margin improvement”.

Consensus estimates had been for the insurer to post net income of $US720m for the year. Revenue was down 1 per cent to $US15.2bn.

Adjusted net cash profit rose 6 per cent to $US733m, while adjusted cash profit return on equity came in at 8.9 per cent, up from 8 per cent the year prior.

QBE posted a combined operating ratio for the group of 97.5 per cent for the year, which was above the target range of between 94.5 per cent and 96.5 per cent. The bushfires that have ravaged Australia’s east coast in recent months contributed to the higher ratio, QBE said.

Calling out the risks posed by climate change, Mr Regan warned insurance premiums may become unaffordable for customers living in areas at risk of extreme weather.

“Climate change is a global risk that has had, and will continue to have, ramifications around the world. It is a material risk for QBE and across our operations,” he said.

Climate change was one of the biggest challenges facing the company, and the global economy, he said.

“Globally, the economic costs from natural disasters have now exceeded the 30‑year average for seven of the last 10 years, while the number of extreme weather events globally has tripled since the 1980s. In 2019 alone, we saw examples of this.”

QBE has begun adjusting its catastrophe models to factor in the expected impacts of climate change out to 2100. From modelling done to date, under an estimated a 2-3 per cent rise in global mean temperatures, it does not expect material increases in claims costs as a result of tropical cyclones in Australia before 2050.

“Annual claims cost related to hurricanes and tropical cyclones could go up by more than 50 per cent in the second half of the century, with a wide variation in local impact, and a rate of change that will depend on how the global community addresses this critical challenge,” the insurer said.

QBE posted an underwriting loss of $US2m for the year compared with an underwriting profit of $US480m last year, equating to a combined operating ratio of 100 per cent compared with 95.9 per cent.

A combined operating ratio is a key measure of profitability. It compares claims and other costs to total premiums. If the ratio is more than 100 per cent then it indicates the underwriting activity is unprofitable.

The result was impacted by a material reduction in risk-free rates used to discount outstanding claims as well as the UK government’s decision to lift payments related to personal injury claims, known as the Ogden discount rate, which added 2 per cent and 0.5 per cent, respectively, to the combined operating ratio.

On a continuing basis, the group posted a combined operating ratio of 97.5 per cent for the year, which was above the target range of between 94.5 per cent and 96.5 per cent. The bushfires that have ravaged Australia’s east coast in recent months also contributed to the higher ratio, QBE said.

The insurer had in December warned its US crop division’s 2019 combined operating ratio would blow out on higher-than-expected claims and adverse weather conditions, pushing the ratio for the entire group above its target range.

But QBE still sees 2020 combined operating ratio coming in at 93.5 per cent to 95.5 per cent.

“Despite the impact of adverse weather conditions on our North American crop business, the underlying fundamentals of our business remain strong and we continue to see improvement in both the quality and resilience of our earnings,” Mr Regan said.

QBE will pay a final dividend of 27c per share, bringing the full-year dividend to 52c per share. The final dividend is up 2c per share on 2018’s payout, but the second-half dividend is lower than last year’s 28c per share.