QBE Insurance Group Ltd (ASX: QBE) continues to face an uphill battle after posting subdued results for the full-year (FY20). What does this mean for QBE’s share price?
QBE is one of the world’s largest insurance and reinsurance companies, with operations in all the major insurance markets. That’s a lot of insurance in one sentence, so let’s break it down.
Put simply, it generates profits through providing insurance products at an adequate premium (price you pay) to cover the expected payouts (the benefit you receive) that will be incurred over the life of the policy. QBE collects these premiums and invests these funds to generate a return through an appropriate investment strategy. QBE relies on these returns to cover the expected payouts.
Big loss due to a rise in claims expenses and a drop in investment income
QBE announced a reported net loss after tax of $1.51 billion, a big turnaround from the net profit after tax (NPAT) of $550 million in FY19. Did COVID-19 spring to your mind when you read this headline?
Add in increased catastrophe activity and an evolving geopolitical landscape, you have a bed of hot rocks for QBE. The company suffered serious burns as catastrophe and accident claims jumped by 62%, and 1,564% respectively compared to last financial year.
On top of this, net investment income dropped to $226 million from $1.03 billion in FY19. Let’s zoom into QBE’s investment asset portfolio to understand its investment strategy.
The report shows it holds 92% of its investment assets in fixed income (defensive assets) and the remaining balance in growth assets. 86% of the defensive assets is represented by corporate and government bonds.
So, the key underlying reason for the poor investment performance is likely attributed to the fall in interest rates, and as a result, the yield on bonds.
In light of the company’s significant net loss, QBE did not declare a final dividend.
Management outlook
QBE’s interim CEO, Richard Pryce appears not to be overly perturbed by the recent results and is focused on turning it around.
Richard Pryce said, “While obviously very disappointed with the headline loss, premium momentum accelerated across 2020 and has continued into 2021. Coupled with the improved positioning of the underlying business, we enter this year with confidence and optimism. I look forward to leading the business in 2021; my primary focus remains performance improvement including that the Group takes full advantage of currently favourable market conditions by maximising premium rate increases while driving targeted growth in portfolios and regions offering the most profitable new business opportunities.”
Hot or cool rocks ahead?
I think the key message to take way from Pryce’s commentary is that he is, ‘focused on taking full advantage of favourable market conditions’. To me, this highlights how much QBE relies on external forces to perform well.
I think it’s impossible to predict how the world will change, especially in a COVID environment. So, I prefer not to invest in a business that largely hangs on the balance of unforeseen events (e.g. disasters or accidents) that may or may not happen in the future.
Investors should also be mindful of another relatively big insurance competitor, Suncorp Group Ltd (ASX: SUN).
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