QBE share price lifts despite potential $100m impact of Ukraine conflict

Here’s why QBE’s catastrophe claims could boom this financial year.

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Key points

  • The QBE share price is taking off on Thursday after the company released an outline of its performance for the March quarter
  • It recorded a 19% growth in its gross written premiums last quarter, driven by its crop segment
  • It also noted it could face a US$75 million impact from its exposure to Russia's invasion of Ukraine 

A message from our CIO, Scott Phillips: “G’day Fools. If you’re like us, you’re dismayed by the events taking place in Ukraine. It is an unnecessary humanitarian tragedy. Times like these remind us that money is important, but other things are far more valuable. And yet the financial markets remain open, shares are trading, and our readers and members are looking to us for guidance. So, we’ll do our best to continue to serve you, while also hoping for a swift and peaceful end to war in Ukraine.” 

The QBE Insurance Group Ltd (ASX: QBE) share price is surging after the company updated the market on its performance in the quarter ended March.

Within the update, the insurer noted it will likely have some exposure to the conflict in Ukraine. That exposure is estimated to have a US$75 million ($103 million) impact.

The company also held its annual general meeting (AGM) on Thursday.

At the time of writing, the QBE share price is $12.48, 3.83% higher than its previous close.

QBE share price gains 4% on strong quarter’s performance

Some of the main points from the update included:

  • 19% growth in gross written premium compared to the same quarter of 2021
  • Ex-rate growth came to 18%
  • Excluding crop, gross written premium increased 15% and ex-rate growth came to 10%
  • Renewal rate increased averaged 7.9%
  • Company flagged potential US$75 million of costs from Ukraine war

What else happened in the quarter?

QBE was faced with more catastrophic weather events over the first quarter of 2022.

Widespread and devastating flooding hit Australia’s east coast last quarter. Meanwhile, Storm Eunice battered the United Kingdom and Europe.

Despite the increased intensity of natural events, catastrophe claims for the quarter remained in line with the company’s allowance.

Last quarter also saw the beginning of Russia’s invasion of Ukraine.

QBE CEO Andrew Horton commented on the war at the company’s AGM, saying, “the tragic loss of life is deeply concerning”.

QBE expects it will be exposed to the conflict through lines including political violence, political risk, and aviation. “While the situation remains dynamic, potential net impact is currently estimated at around $75 million, and the ultimate impact from the conflict will be reported in catastrophe costs,” the company said.

Finally, QBE worked to reposition its investment portfolio over the quarter. As of 31 March, risk assets represented 9% of its total investment assets.

Risk-free rates increased last quarter, resulting in a negative asset risk-free rate impact of US$459 million. That was mostly offset by a US$440 million beneficial claims liability discount impact.

As a result of higher risk-free rates and slightly wider credit spreads, last quarter’s exit fixed income running yield of 1.52% increased materially on the financial year 2021 exit running yield of 0.68%.

Last quarter’s exit running yield of 1.52%, alongside QBE’s expected risk asset return of approximately 5.5%, would equate to a first-quarter exit total investment return run rate of approximately 2%.

What did management say?

Speaking on the news driving the QBE share price higher today, Horton commented:

Despite a number of natural catastrophes and significant geopolitical events, positive momentum experienced through [financial year 2021] continued into [last quarter], and I was pleased with QBE’s resilience through what was a turbulent operating environment.

We have had a strong start to the year for gross written premium growth and will review [financial year 2022] outlook at the half-year result following the key mid-year renewal period.

What’s next?

QBE hinted at what might be included in its full-year results.

It estimates its crop gross written premium will be approximately US$3.3 billion in financial year 2022. That would be a notable jump from US$2.7 billion in financial year 2021.

Due to the increase, QBE has placed an external quota share on the 2022 underwriting year to manage net retention.

Its crop net earned premium is expected to be between approximately US$1.3 billion and US$1.4 billion. That’s up from US$1.2 billion in financial year 2021.

The insurer is also working to “reinsure legacy North American excess and surplus lines prior accident year liabilities”.

That’s expected to reduce its exposure to further reserve volatility in this run-off portfolio and to impact QBE’s financial year 2022 underwriting result by approximately US$50 million.

QBE share price snapshot

Today’s gains have helped boost the QBE share price further into the long-term green.

Right now, the company’s stock is trading for 5% more than it was at the start of 2022. It has also gained 20% since this time last year.

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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