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QBE back in the black amid fall in catastrophe claims

Lex Hall  |  25 Feb 2019Text size  Decrease  Increase  |  
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QBE shares are trading higher after the insurer climbed back into the black with a full-year profit of US$390 million ($546 million) following a drop in catastrophe claims. 

At 4pm on Monday, QBE (ASX: QBE) was up 3.92 per cent, at $11.93 - a 5 per cent discount to its Morningstar fair value estimate of $12.50. The news is tempered however by a potential fall in the franking rate. 

The company today reported attritional claims for the 12 months to 31 December were lower across all divisions compared to 2017.

Catastrophe claims fell to $US523 million in 2018 from US$1.2 billion in 2017 - a fall of 44 per cent.

In 2017, one of the worst years on record for the global insurance industry, QBE posted a $US1.25 billion loss following hurricanes and wildfires in the US.

QBE will pay a final dividend of 28 cents, partially franked, up from 4 cents a year ago.

Helping improve the underlying quality of the business and its financial performance was the decision to offload QBE's Latin American operations and the Australia-New Zealand travel insurance arm, said chief executive Pat Regan.

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"Significant portfolio rationalisation and simplification, successful placement of the restructured 2019 reinsurance program, divisional consolidation and initiation of a three-year operational efficiency program position us well to deliver further value for our shareholders in 2019," Regan said.

The company expects to complete the sale of operations in Colombia, Puerto Rico, Indonesia and the Philippines during 2019.

Morningstar senior banking analyst David Ellis was encouraged by the result and said QBE's internal changes were working.

"Catastrophe costs fluctuate, and premium rates can too but QBE benefited from improvements in its core underlying business," Ellis said.

"There is clear evidence that the restructuring and remedial work is paying off, businesses have been sold and disposed of. There's tighter underwriting, better claims management and pricing. So, the underlying business is improving.

"Another factor is higher global pricing in North America, Europe and Australia - all three of the main divisions reported better insurance premiums." 

Another positive is the customer retention rate, which is stable at 81 per cent.

QBE has indicated a combined operating ratio between 94.5 and 96.4 per cent.

The combined operating ratio is a measure of the measure of the quality of the underwriting result. A COR below 100 indicates an underwriting gain.

"The outlook is good," Ellis said. "There should be premium rate increases and further improvements in claims management, underwriting and pricing.”

QBE also expects investment returns of 3 to 3.5 per cent.

On the franking front, the company has indicated that by the start of next year its franking rate might fall to 10 per cent from 60 per cent in 2019.

Ellis notes that while the rate fluctuates it is a sharp fall.

"It was 30 per cent in 2017. In 2018, the interim rate was 30 per cent, and the final dividend for 60 per cent. In 2016, it was 50 per cent."

is senior editor for Morningstar Australia

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