QBE faces downgrade pressure as hunt for new CEO continues

QBE could face pressure for a further top-up of its insurance provisioning even after its monster pre-Christmas downgrade.

Analysts suggest asset sales could be on the cards for QBE.

QBE could face pressure for a further top-up of its insurance provisioning even after its monster pre-Christmas downgrade, which put a hole in its full-year earnings outlook.

The global insurer this month warned of a full-year loss of $US1.5bn ($2bn), due to its bottom line being hit by large writedowns, potential COVID-19 payouts and elevated catastrophe costs.

Ratings agency Fitch has become the latest to cut the outlook on QBE’s credit rating to negative, from stable, following the downgrade. Fitch lowered its rating to “A-minus”, from “A”, blaming the “material drop in QBE’s 2020 ­financial performance and the ­uncertainty over a recovery in profitability”.

The downgrade comes as QBE is on the hunt for a new chief executive following the sudden exit of Pat Regan in September over a conduct issue.

Brokerage Citi labelled QBE’s latest profit warning “disappointing” and noted the insurer had an ongoing track record of profit downgrades in November and December as “reserving continues to prove inadequate”.

Even so, Citi analyst Nigel Pittaway kept his buy rating on QBE’s shares, saying they looked “relatively inexpensive” against the backdrop of some of the strongest increases in insurance premiums in almost two decades.

Mr Pittaway suggested that asset sales could be on the cards.

“QBE suggests its independent actuaries believe the US industry needs to lift reserving assumptions and much of its top-up reflects this trend,” Mr Pittaway said.

“However, we also wonder whether its motivation is partly to increase its chances of divesting a long-term underperforming ­business in a favourable [premium] rate environment.”

QBE said it expected a statutory net loss of $US1.5bn 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 insurer’s annual result is also being affected by a pre-tax hit of $US470m for COVID-19 costs, $US130m of elevated catastrophe costs exceeding its $US550m natural disaster allowance, and $US360m of prior accident year claims development.

Still, QBE said full-year net investment income had rebounded and was expected to be $US140m, compared to a loss of $US90m in the first half.

Brokerage Macquarie Equities also suggested that QBE could be looking to exit some businesses.

The need for ongoing reserve strengthening in the US “reinforce our long-term concerns that large portions of the group remain non-core to QBE’s DNA,” Macquarie Equities said in a note to clients.

Still, Macquarie analysts said: “We do not believe this will be the last rebasing by QBE.”