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QBE Insurance Group Ltd shares sink lower on profit warning

In morning trade the QBE Insurance Group Ltd (ASX: QBE) share price has been one of the worst performers on the Australian share market and has sunk 6% lower to $9.86.

What happened?

This morning the insurance giant advised that it now expects to report a FY 2017 combined operating ratio (COR) of around 104%. This is above the target COR range of 100% to 102% that was outlined in its October update.

For those that are unaware of this term, the COR is essentially the sum of the net claims, commissions, and expenses divided by its net earned premium. A COR of under 100% indicates profitable underwriting, and over it, as in the case of QBE Insurance, means unprofitable underwriting.

According to the release, the reason for this increased COR is largely down to significant catastrophe activity in the fourth quarter of the year. This includes the Californian wildfires, December storms in Australia, and Hurricane Maria. These events added an additional 1% to its COR.

Furthermore, after a detailed review of year-end claims reserves, the company strengthened its claims provisions by around $110 million, primarily in North America and Asia Pacific. This also added around 1% to its FY 2017 COR.

It doesn’t end there, though, unfortunately. The company has also revised assumptions used to support the carrying value of its North American goodwill, resulting in an impairment charge of around $700 million.

And lastly, the reduction in the US corporate tax rate to 21% is going to be a negative for QBE Insurance initially. It has given rise to a $230 million write-down on the carrying value of deferred tax assets in its North American Operations.

As a result of all of this, management expects to report an after tax loss of approximately $1.2 billion in FY 2017.

Should you invest?

While QBE Insurance is forecasting a much improved performance in FY 2018 and is targeting a COR range of 95% to 97.5%, I don’t have a great deal of confidence in its ability to forecast its COR accurately.

In light of this, I would suggest investors stay clear of QBE Insurance and consider industry peers Suncorp Group Ltd (ASX: SUN) and Freedom Insurance Group Ltd (ASX: FIG) instead.

Alternatively, investors could skip insurance shares altogether and snap up these stunning growth shares.

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