QBE warns of claims blowout in US crop insurance

QBE has issued a profit downgrade as higher-than-expected claims hit its North American crop insurance business.

QBE chief executive Pat Regan. Picture: Britta Campion

Insurer QBE has issued a profit downgrade less than two weeks out from the end of its financial year as higher-than-expected claims and adverse weather conditions hit its North American crop insurance business.

The global insurer on Wednesday warned the crop division’s 2019 combined operating ratio — a key measure of profitability — would blow out to between 107 per cent and 109 per cent on net earned premium of nearly $1.2bn, pushing the ratio for the entire group “slightly above” its previous guidance of between 94.5 per cent and 96.5 per cent.

A combined operating ratio 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 new estimate for the crop business is significantly higher than the 98 per cent QBE had forecast in August and well above the 10-year average of 90 per cent.

QBE closed down 15 cents at $13.13

“It’s been an unusually weather-impacted harvest in North America this year. But we’ve got a terrific crop insurance business that should stand us in good stead looking forward. The rest of the group continues to perform well,” QBE chief executive Pat Regan said.

An unusually wet spring in the US had resulted in crops being planted late, which meant they were more at risk from the adverse weather conditions, the insurer said. It also received a large number of planting and hail claims in recent months.

“The adverse weather conditions are also anticipated to contribute to slightly elevated attritional loss experience in some of our North American property classes,” QBE told shareholders.

The blowout of the North American combined operating ratio meant the ratio across the entire group “could be slightly above” its previous guidance of between 94.5 per cent and 96.5 per cent, QBE warned. This was despite the expected improvement in the overall attritional claims ratio and favourable catastrophe experience during the first half.

On a positive note, pricing momentum had accelerated in the third quarter, QBE said, delivering a stand-alone premium rate increase of 7.5 per cent, up from the 4.7 per cent in the first half.

The improved pricing momentum, along with higher margins, means QBE is now targeting a 2020 combined operating ratio of between 93.5 per cent and 95.5 per cent.

But the insurer reduced its investment return target for 2020 to between 2.5 per cent and 3 per cent on the expectation of lower interest rates around the globe. This compares with the 2019 target of between 3 per cent and 3.5 per cent.

QBE shares slumped more than 5 per cent following the profit warning before clawing back some of the losses to finish down 1.13 per cent at $13.13.