QBE escapes Irma’s trail of destruction
While QBE Insurance Group is heavily exposed to property in Florida, the earnings hit from Hurricanes Irma and Harvey will be small as the global insurer has plenty of catastrophe reinsurance cover.
After two landfalls, Hurricane Irma - one of the most powerful storms ever recorded in the Atlantic - was on Monday bringing devastating winds and storm surges to Florida.
According to Citi analyst Nigel Pittaway, with very preliminary estimates putting the cost of Hurricane Irma between US$20 billion and US$65 billion and the cost of Hurricane Harvey creeping up towards US$30 billion, there seems some chance of an industry capacity crunch that will drive up rates.
“This could mean growth is back on the agenda for QBE, perhaps suggesting some upside risk to top line forecasts. QBE’s earnings remain hard to predict and some investors may see it as uninvestible currently, but risk/reward may be starting to tilt in investors’ favour," he said.
Pittaway also told clients that the two record-breaking storms have hit the industry at a time when it is extremely well capitalised, leaving some doubt as to both the magnitude and duration of any ensuing turn in rates.
“Even so, there seems a good chance of at least some improvement in market conditions in the short term.”
Although there are one or two uncertainties, the analyst went on to say there seems a strong likelihood that the entire cost of the two hurricanes for QBE will be covered by the combination of its catastrophe reinsurance cover, leading to a net cost of just US$5 million for the two hurricanes.
This estimate includes exposure through its reinsurance arm. QBE’s insured value exposure to commercial residential property in Florida is estimated at US$17 billion, roughly equivalent to a 10 per cent market share of this class.
“However, we understand QBE’s insurance is sufficient to cover a 1 in 200-year event with US$130 billion in industry cost.”
Pittaway qualified this by warning that there is some risk from additional events this year. For instance, he noted that QBE failed to disclose how much of its aggregate deductible had eroded at 30 June 2017 and it remains uncertain.
By this, the analyst is referring to a contract where the insured bears the losses up to an agreed upon amount. However, he added it would seem unlikely this event tips it over the US$2.05 billion aggregate limit - a cap that covers all catastrophes and large risk events
“Exposure to any further still-to-occur events could, however do so," he added.
UBS analyst James Coghill agreed that QBE's broader US earnings and pricing should not be too badly affected.
“Relative to Harvey, wind losses from Irma are likely to be a bigger component of losses than flooding, although storm surge is now an escalating concern,” he added.
In his view, QBE has negligible motor and traditional homeowners' market share across Florida, but does write 2.1 per cent of policies (9.8 per cent of insured values) in the commercial residential property market.
According to Coghill, a large contributor to QBE's exposure is via a specialist managing general agent focusing on condominiums and apartments. He is also not happy that QBE has declined to say how much of the aggregate deductible has been eroded.
“Although it's clearly too early to be definitive, it is likely that claims costs from both hurricanes may erode the deductible, but are unlikely to significantly deplete the $900 million aggregate protection layer," he said.
“Two significant hurricane hits do, however, increase the risk that events later in the year could fully utilise the aggregate, and therefore implicate guidance.”