Investment Matters

Company news: QBE Insurance

QBE Insurance, disappointingly, issued a profit downgrade. 

The downgrade was caused by the company's Emerging Markets' division.  In particular, increased medium size claims in Asia, weather related claims in Latin America and adverse experience in legacy portfolios in Latin America (i.e. long tail claims cost more than they thought they would).

This has resulted in the estimate for the company's H1 FY-17 COR (combined operating ratio, <100% = profit) being between 94.5% and 96.0% (was 93.5% to 95.0%).  This will flow through to lower net profit for H1 FY-17, to be in the order of 5% less than previously forecast.

Two positives were also announced, both of which bode well for the longer term outlook.  Investment return (essentially income from investing premium income) will be at the top end of the previous guidance of 2.5% to 3%.  Additionally, the company's core geographies, A&NZ, North America and Europe, are performing well.

(QBE's end of financial year is 31-Dec, thus it is concluding it first half reporting period shortly.)

Although this was a relatively small downgrade, the market penalised the company quite severely (-10.3% on the day of the announcement).  We believe that this was caused by:

1.  It was a late downgrade (it is almost the end of the financial year).  In QBE's defence, the timing of factors driving the downgrade (especially weather in Latin America), may have made it difficult for QBE to see the issues earlier. 

2.  QBE has a poor track record in relation to providing earnings expectations, then having downgrades.  Whilst we acknowledge this, and also find it frustrating, the nature of this downgrade (not a large downgrade, and core geographies performing well and growing), means that we need to put it in perspective rather than becoming emotional about it.