Wednesday 31 January 2018 by Asmita Kulkarni Company updates

QBE earnings revision and ratings outlook change

Last week, QBE provided a market update outlining revisions to its FY17 combined operating ratio (COR) and profit. QBE is expected to report a FY17 loss after tax of around AUD1.2bn as a result of higher than expected COR and two significant one off, non cash charges. The nonrecurring items include an AUD700m impairment charge to the carrying value of goodwill of its North American operations, and an AUD230m write down of the carrying value of deferred tax assets of the North American operations, due to the reduction in the US corporate tax rates.

QBE expects to report a FY17 COR of 104%, which is higher than the previous market guidance of 100-102%. This is primarily due to significant 4Q17 catastrophe activity, including Californian wildfires and December storms in Australia, coupled with some adverse development of Hurricane Maria, which added to around AUD130m to the net cost of catastrophes. Furthermore, QBE strengthened its claims provision by AUD110m, primarily in North America and Asia Pacific (largely Hong Kong workers’ compensation).

QBE’s FY17 investment return is expected to be 3.2%, or AUD800m. The company is guiding FY18 net investment return of 2.5-3.0%.

The FY17 results release is scheduled for 26 February.

Yesterday, S&P revised the outlook on QBE to Stable from Positive, following the earnings revision. QBE’s core operating entities were affirmed at A+ and the holding group’s rating was affirmed at A-. S&P believes QBE is unlikely to realise material benefits of remediation activities across the group in the near term. However, S&P expects QBE’s headline and underlying earnings to rebound in FY18 and FY19, reflecting lower attritional claims, and improved expense base and progressive benefits flowing from remediation.