QBE posts $1.9b loss after ‘costly catastrophe year’, scraps dividend

QBE chief executive Richard Pryce has said last financial year was one of the most expensive in history for natural disasters claims, driving the insurer to a $US1.5 billion ($1.93 billion) loss and prompting it to suspend its final dividend.

Mr Pryce told investors on Friday he was “very disappointed” with the full-year loss, caused by mounting catastrophe claims, record low investment income and ongoing uncertainty around COVID-19. It’s a major swing from 2019’s $US550 million profit and final dividend of 27 cents per share.

“The board and management at QBE recognise last year’s results are extremely disappointing and well below our expectations,” he said. Mr Pryce took over as chief executive in October following the sudden departure of Pat Regan after a workplace complaint.

The global insurer was hit by ongoing uncertainty around exposure to COVID-19 business interruption claims and more natural disasters.
The global insurer was hit by ongoing uncertainty around exposure to COVID-19 business interruption claims and more natural disasters.Credit:Bloomberg

QBE’s combined operating ratio (COR) – the difference between premiums received and claims paid – was 107.4 per cent for the year, compared with 99.5 per cent in 2019. A ratio of more than 100 per cent constitutes an underwriting loss. QBE’s figure came in even worse than market expectations, with Citi estimating 106.2 per cent.

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This was driven by the group’s natural disasters bill for the year, which totalled $US668 million or 5.8 per cent of net earned premium – up from $US426 million in the prior year and $US134 million above its allowance. The bulk of these claims came from last summer’s Australian bushfires and east coast hail as well as fires in the US and Atlantic hurricanes.

“Although a number of reinsurers have described 2020 as the fifth worst year on record, it was much worse for primary insurers because it was driven by frequency rather than severity,” Mr Pryce said.

“It was widely regarded as one of the costliest catastrophe years in history.”

COVID-provisions increase

QBE expanded its provision for COVID-19 losses by $US185 million in January after suffering another defeat in the UK courts over whether insurers are liable to pay out business interruption claims to policyholders impacted by COVID-19 lockdowns.

QBE is headquartered in Sydney but has global operations that span the UK, America, Europe, Asia and Bermuda.

The insurer is bracing for at least $US785 million in total business interruption claims, but said the exposure in Australia remains uncertain, pending further legal action.

The Australian insurance industry lost a pivotal case in the NSW Supreme Court of Appeals last November, with five judges unanimously siding with policyholders in determining insurers were liable to pay business interruption claims to cover losses related to COVID-19. The insurance industry has appealed this decision to the High Court but Mr Pryce said legal action could continue for years to come.

“Regardless of the outcome of the application and any ensuing appeal, there will be further test cases to resolve legal issues around interpretation of common business interruption policy wordings and those cases will take some time to be heard and even longer for the rulings to be handed down,” he said. “The time frame could easily extend towards the end of 2021 and beyond.”

QBE’s net investment return in 2020 was 0.9 per cent, compared to 3.9 per cent from the prior year, with closing funds under management sitting at $US27.7 billion. Mr Pryce said the low investment return was caused by “obvious reasons” but the group benefited from an up-tick in markets in the second half of the financial year.

QBE’s board elected not to pay a final dividend in light of the substantial losses, but said an interim dividend would be paid if “economic conditions did not deteriorate materially”.

In some positive news for the business, QBE clawed back margins by hiking premiums across all regions for an average rate increase of 9.8 per cent.

QBE shareholder and Atlas Funds Management chief investment officer Hugh Dive welcomed the premium rises, saying they would not impact volumes because insurance was a non-discretionary item for many commercial businesses.

“If you own an office tower, you have no choice. You have to get building insurance,” he said.

QBE’s shares closed the session 3.1 per cent higher at $8.99 per share and Citi analyst Nigel Pittaway said the group’s expense targets and pricing momentum “should be enough to support the stock”.

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