QBE braces for more Covid payouts as shares dive after UK ruling

QBE has lifted its COVID-19 allowance following the adverse outcome of a crucial business interruption test case in the UK.

QBE on Monday told shareholders its total COVID-19 allowance had swelled to $US785m ($1.02bn).

QBE’s shares tumbled more than 5 per cent after the insurer lifted its COVID-19 allowance as it prepares to pay out a higher-than-expected number of claims following the adverse outcome of a crucial business interruption test case in Britain.

QBE on Monday told shareholders its total COVID-19 allowance had swelled to $US785m ($1.02bn), including total risk margins of $US300m, with fiscal 2020 COVID-19-related costs now expected to hit $US655m, close to 30 per cent higher than the $US470m it forecast only last month.

Despite the higher COVID-19 allowance, QBE said its statutory loss for fiscal 2020 would not materially change from the guidance provided last month, following higher-than-expected investment income “and other favourable movements”.

But investors appeared to be homing in on the growing risk of business interruption payouts, and the fading prospect of even a token final dividend, sending the shares down 5 per cent to $8.08 in morning trade.

QBE in December forecast a full-year loss of $US1.5bn as its bottom line was hit by large writedowns, COVID-19 costs and elevated catastrophe costs. Its shares have tumbled 18 per cent since then.

The insurer’s move to strengthen its risk margins by a further $US185m to restore downside protection came after the UK Supreme Court on Friday upheld the High Court’s ruling in favour of policyholders with respect to one of QBE’s disease policy wordings and went even further, reversing the prior ruling in the remaining two of its policy wordings examined by the court, which had gone in QBE’s favour last year.

Business interruption insurance covers the loss of income a business suffers if it is forced to close due to an event beyond its control such as a natural disaster. Insurers have vehemently argued that it should not cover business closures due to a pandemic.

“Although the UK Supreme Court ruling does not directly impact QBE’s net profit, the increase in gross UK insurance business interruption claims has the effect of utilising additional aggregate reinsurance limit, thereby reducing downside protection with respect to potential Australian business interruption claims,” QBE said.  Morningstar banking and insurance analyst Nathan Zaia said the higher British claims would now take up more of QBE’s reinsurance cover, forcing it to lift its allowance.

“As the UK interruptions eat into their reinsurance cover … they’ve got to find the money from somewhere,” he said.

Mr Zaia said that following last month’s update and the higher allowance, he is not expecting a dividend at the full-year result.

Britain’s Financial Complaints Authority, which brought the crucial business interruption test case after the pandemic and widespread lockdowns forced business closures across the county, said 370,000 policyholders and 60 insurers could be affected by its outcome, with the value of claims estimated at over £1bn ($1.8bn).

QBE had previously estimated the British ruling could cost it $US170m in claim payouts before allowing for recoveries under its reinsurance program, but on Monday warned that figure would now rise.

“While the gross cost of UK insurance business interruption claims will increase as a result of the ruling, the net cost remains unchanged at $US70m,” it said. The net cost remains unchanged due to its reinsurance protection.

“Given an already material gross Australian business interruption claims provision, substantial risk margins and significant reinsurance protection (including a modest amount of remaining aggregate protection), the group believes it has allowed for potentially severe Australian business interruption scenarios,” QBE said.

The final ruling from the British court on Friday comes as Australian insurers await a decision on their leave to appeal a separate business interruption case undertaken last year by the Australian Financial Conduct Authority.

The local insurance industry in November suffered a stunning loss of the test case when the NSW Court of Appeal found in favour of two insured businesses which had seen their income dive as a result of the lockdowns.

While the British judgment is separate to the Australian case and examined different issues related to business interruption cover, it is nonetheless a blow for local insurers and the Insurance Council of Australia, which has been mulling a second test case following the loss of the first.

The prospect of that second test case was now in doubt, Herbert Smith Freehills partner Mark Darwin told The Australian.

“The UK ruling won’t affect the issue that’s in the Australian test case, which is about whether an exclusion in the disease extension applies, notwithstanding the failure to update the reference to the current legislation.

“But the judgment rules against insurers on the causation issues.”

Mr Darwin said it was likely the High Court would grant the ICA leave to appeal.