The QBE Group has shocked investors by revealing that half-year profits will take a hit from underwriting losses in its emerging markets business incurred in the early part of 2017.
The insurance giant's shares took a 10.3 per cent dive to $11.86 after it released weaker earnings guidance on Wednesday, reminding shareholders of the insurance giant’s long track record of missing numbers, making mistakes and issuing surprise profit warnings.
The company did not warn of any problems in its emerging markets business at its annual general meeting last month.
According to the insurance giant, the problem was a higher-than-expected frequency of medium-sized claims in Asia (some not covered under reinsurance cover) and a rise in weather-related claims in Latin America.
This included crop losses in Ecuador (also not covered under reinsurance contracts) and deteriorating claims trends in the Columbian legacy portfolio because of fraudulent claims activity.
A nasty habit
In an update to the market ahead of its interim results on August 17, QBE said that heightened claims activity is expected to cause that division to report a first half combined operating ratio of around 110 per cent. A COR over 100 indicates an underwriting business is unprofitable.
Dragging down the profitability ratio of the entire group, the increase in claims is expected to add around 1 per cent to the group's interim and full year COR to 94.5 per cent and 96 per cent respectively.
“Profit warnings are becoming a habit – surprises where you least expect them,” noted UBS insurance analyst James Coghill, who has cut Earnings-per-Share forecasts by 9 per cent for 2017 and 5.8 per cent for 2018.
“Although QBE's three major regions are performing in line as we expected, we believe today's warning on Emerging Markets - 11 per cent of 2017 Gross Written Premium - will raise the obvious questions around the quality of the company's overall portfolio and whether further divestitures are required.
“Furthermore, we think questions will be raised about QBE's ability to sufficiently cover all bases across a complex group to frame and deliver on profit guidance.
“Medium-term EPS downgrades are clearly disappointing, but with improving market conditions across Australia and New Zealand and greater stability in QBE's other major regions, we're not changing our overweight view on QBE and the sector.”
In a bid to offset the bad news, the gloabl insurer said its premium income was consistent with earlier targets and in line with expectations and its interim investment return was currently above expectations.
Chief executive John Neal highlighted the better performance in its more significant divisions, but also acknowledged the weaker performance in its emerging markets businesses.
"We are encouraged by the improvement in the combined operating ratio in Australia & New Zealand as well as North America while Europe continues to perform well," he said in a statement.
However,the chief executive admitted the heightened claims activity in emerging markets would drag down the company's results.