The share price of QBE Insurance Group Ltd (ASX: QBE) dropped 10.3% to $11.87 yesterday after the company released a surprise downgrade to its full year results. Higher than expected claims in emerging markets will result in the Group earning lower margins than was previously expected. This was blamed on:
"…a combination of increased frequency of medium sized risk claims in Asia, weather related claims in Latin America and adverse experience in legacy portfolios in Latin America."
Bumpy earnings and unexpected claims go with the territory when you own insurers, however this latest update suggests that QBE continues to struggle with pricing its risk. The emerging markets segment is expected to report a combined operating ratio of 110%, which means that it lost more in claims and expenses than it received in premiums. For obvious reasons, this is unsustainable.
As reported by Fairfax media, analysts took their knives to the company's reputation yesterday:
"Today's warning… will raise the obvious questions around the quality of QBE's overall portfolio" – James Coghill, UBS
"It is another stuff-up by QBE. The management, their track record is in tatters…" – David Spotswood, Shaw & Partners
"…it's a sense of déjà vu. Twelve months ago there was the Australia/ New Zealand surprise downgrade." – Daniel Toohey, Morgan Stanley
Ultimately QBE has failed to generate much improvement on its operations in the past two years (some wags would suggest the same holds true for several years before that). It's perhaps a sign that the company is too large, with too many moving parts to be turned around quickly.
On the plus side for shareholders, the business appears exceedingly unlikely to go bankrupt, and last year's annual report suggests it has over A$6 in tangible assets (cash and investments) on its balance sheet.
There is a good case to be made for owning QBE in the expectation of improving operations and rising interest rates, although as we have seen yesterday the former may not be a short-term thing. There is a price at which I'd own QBE, but I'd want to pay less than $10 for it.
