QBE catastrophe allowance not conservative enough: analysts

A new boss at QBE may look ‘fairly quickly’ at addressing the insurer’s catastrophe allowance, analysts say.

Macquarie analysts have lowered midterm forecasts for QBE. Picture: Bloomberg

QBE’s move to increase its net catastrophe allowance by 25 per cent is not conservative enough, with earnings risks skewed to the downside, UBS analysts have warned.

A day after QBE released details of its reinsurance program for 2021, headlined by an increase in its catastrophe allowance to $US685m, UBS analysts led by Andrew Adams flagged that the insurer’s yet-to-be-appointed new CEO may look to address the deficiency “fairly quickly” once in the top job.

“While the increase (to $US685m) is largely in line with our forecast, this has been a point of debate with investors and a key driver of our forecasts being 10-15 per cent below consensus,” the analysts told clients. “As such we expect consensus downgrades of 5-10 per cent on this announcement.

“QBE has retained more risk in 2021 and on our calculations the increased allowance would have been exceeded in the recent 2020 year,” they said.

UBS expects QBE to incur around $US250m of claims less than US$10m, meaning they would not be covered by its reinsurance.

“QBE is then allowing for $US435m of large events in its reset allowance, with a US$190m gap before their aggregate cover now kicks in.

“Therefore, while encouraged by QBE’s decision to increase its allowance in 2021, we don’t consider this to be conservatively set and earnings risk remains to the downside. This is something that a new CEO may look to address fairly quickly when the role is filled,” the analysts said in a note.

Elsewhere, analysts at Macquarie, after poring over the same QBE update, lowered midterm forecasts for the insurer and maintained their underperform recommendation for the stock.

Macquarie cited the higher catastrophe allowance, ongoing softness in investment returns and the lack of significant margin expansion for global peers (despite significant premium rate rises) as reasons for the downgraded forecasts.

“Ongoing reserve strengthening in the US and the lack of a correlation between QBE’s definition of attritional claims ratios and group earnings per share/net profit after tax reinforce our long-term concerns that large portions of the group remain non-core to QBE’s DNA,” they told clients.

Macquarie also reduced its group investment return forecasts for fiscal 2021 to 1.1 per cent from 1.3 per cent, following a trading update from the insurer last month.

QBE in December warned that it would take a $US1.5bn loss for the year ended December 31, including a $US520m non-cash writedown of North America goodwill and deferred tax assets, and $US100m of technology and real estate related writedowns.

The analysts are tipping a 4c per share dividend will be announced when QBE reports its full-year numbers next month.

“We do not expect QBE to provide fiscal 2021 guidance for combined operating ratios or group investment returns.

“Consistent with the first-half results, we include only a 4c per share dividend in the second half (versus 27c per share in the second half of 2019),” they said.

Macquarie expected QBE to return to its normal payout ratio of 55 per cent of cash profit in fiscal 2021.

Analysts at Morgan Stanley were of the view that QBE’s reinsurance renewal avoided the tail risks that bears were concerned about. It also showed “a focus on better quality reported results”, they told clients.

“We have baked in around an 8 per cent increase for QBE’s fiscal 2021 estimated reinsurance costs, or around a 16 per cent reinsurance cession ratio.

“We think this aligns with QBE seeing risk adjusted reinsurance rate rises of less than 5 per cent on its main catastrophe tower,” they said.