QBE Insurance Group Ltd (ASX:QBE) announced more losses and another disappointing result to the market this morning.
The part of the announcement that most stood out to me was the $110 million that had to be set aside for claims recorded primarily by QBE's workers compensation business in Hong Kong. Workers compensation has long been a thorn in the side of QBE. This business is dangerous, like picking up pennies in front of a steamroller, and so far, QBE mostly seems to have been steamrolled by it.
Performance at the rest of the company's operations was also sub-par, according to the combined operating ratios:
- North American Operations – 109%.
- European Operations – 95%.
- Australian & New Zealand Operations – 92%.
- Asia Pacific Operations – 115%.
- Latin American Operations – 114%.
- Equator Re – 141%.
The combined operating ratio is a measure of premiums taken in (revenues) minus the costs of conducting the business and paying claims. A ratio above 100% indicates that the insurer lost money, and a ratio above 95% I would describe as 'marginal'. (This is only one year however, and ratios can be affected by cyclones and so on, so it is necessary to view the ratios over a number of years to determine if business is OK.)
I wrote about QBE as a possible buy a couple of months ago. I looked at the company more closely but never pulled the trigger – fortunately, as it turns out. While I think that a lot of things in the industry (interest rates, insurance pricing etc) are turning favourable to QBE, today's update makes me question whether the company has a good enough business to even benefit from better industry conditions.
QBE has had problems for years and years and I'm beginning to think management should just break it up and sell it off. From the perspective of an outsider, I have also wondered whether many of QBE's businesses (e.g. workers insurance and the Americas) are operating in an overly competitive industry or are failing to price risk appropriately. The $700 million writedown in the value of the North American business also suggests that operating conditions for this business are expected to remain poor well into the future.
Management has launched yet another detailed review of the business, and it sounds as though CEO Pat Regan may have divestments on his mind: "At the same time, we are conducting a strategic review of our Latin American Operations as we look to simplify the Group and reduce risk."
I still think QBE is the more attractive of Australia's two large insurers, but with its persistent problems I'm probably going to keep watching from the sideline – just as I have for the last 8 years.
