QBE Insurance Group Ltd (ASX: QBE) shareholders will be hoping a new round of cost-cutting can resurrect its share price.
QBE is Australia’s largest global insurer, it operates in 31 countries and one of the top 20 global insurance and reinsurance companies.
QBE has been operating since 1886 and got its name when the North Queensland Insurance Company and Bankers’ and Traders’ Insurance Company (both set up by James Burns and Robert Philp) merged with The Equitable Probate and General Insurance Company.
The QBE cost-cutting plan
QBE plans to find net cost savings of around $130 million in the next three years so it can achieve an expense ratio of approximately 14% in 2021.
The insurance company recently consolidated its business into three segments: North America, International Markets and Australia Pacific.
It is planning to make its operations more effective by, “consolidating technology tools, reducing IT costs and re-engineering and automating processes.”
It’s going to find more than $200 million in gross cost savings before underlying inflation and further investment in the “Brilliant Basics” program, technology and digitisation. The targeted $130 million net reductions will reduce the current $1.8 billion annual bill.
However, there will be around $95 million of restructuring costs over 2019 and 2020.
2019 reinsurance program
QBE also announced it has finished its 2019 reinsurance program.
It includes significantly reduced catastrophe retention, increased protection against catastrophe severity, protection against the frequency of medium-sized catastrophes, reduced large individual risk claim retention & claim severity and increased quota share protection to further reduce claims volatility.
The changes will see the probable maximum loss of a 1-in-20 year cyclone event reduce by 20%. The loss associated with a 1-in-200 year Australian cyclone event will fall by 35%.
QBE said that the 2019 program is expected to save $125 million in reinsurance costs, but will be offset by the increase in the budgeted allowance for large individual risk.
Is it time to buy QBE shares?
The QBE share price has fallen by nearly 20% over the past two years. Despite selling some of its less-liked segments like Latin America and its travel insurance, QBE has been unable to generate sustainable profit growth.
It was a more profitable business a decade ago where it was earning a return on equity in the double digits, whereas in the past few years it has been in the single digits according to Commsec.
Increasingly expensive climate events aren’t good for insurance companies. And insurance is a very competitive sector, so it’s hard for any business to create a strong economic moat. By contrast, the 3 shares included the in the free report below are good examples of businesses creating growth for shareholders.
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