Global insurer QBE 8217 s second strike

It’s very easy to get caught up on financial businesses that look cheap on face value. When QBE downgraded its earnings in January, we said “there won’t be too many brave investors willing to catch this falling knife”. Our grievance wasn’t necessarily that an insurance business had lost money, but rather the way it translated the loss to the market. Within only two months in late 2011 it saw a large reversal in its earnings. That’s life, insurance businesses make and lose money over the cycle. But the thing that struck us most was the big promise of a turnaround in 2012, a very emotional promise built on unrealistic assumptions and the hope that now more “one-off” catastrophes occur.

Today’s downgrade shows that bet hasn’t paid off. The impact of Superstorm Sandy has left QBE exposed and the money it set aside in 2012 when writing premiums has not been enough to cover its new exposures. This is what happens when businesses try to go too hard in too short a time. Instead of making a profit of US$1.6bn this year as market consensus estimates were pointing too, QBE now hopes for pre-amortisation earnings of around US$1bn. That’s not necessarily a bad number, it’s just that the market is now starting to completely lose trust with management and more importantly the board.

Bottom line: For us it’s not about the numbers only. Insurance companies can book the most attractive earnings but if they’re taking onboard too much risk it will eventually come back to bite. QBE has done the right thing by shareholders in the way it has conservatively invested funds during a turbulent time in equities markets. But at the end of the day this is an insurance business and the way risk is managed is now under scrutiny. The 2001-2011 decade run up in profitability was probably more good luck than good management. As QBE tries to find its way again, IAG quietly continues to push into Asia through very attractive acquisitions. Perhaps it has learnt its lessons of failure in the UK but that’s what business is all about – learning from your mistakes, admitting them and moving on. QBE is still in denial.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.