Ord Minnett has made changes to its earnings forecasts for QBE Insurance to incorporate: 1) COVID-19 losses for business interruption, trade credit and lenders’ mortgage insurance (LMI); 2) investment losses and full allowance for the capital raising, portfolio derisking and purchase of reinsurance; and 3) QBE’s mark to market.
The provisions amount to about 6% of one year’s net premium versus 4.5% as estimated by Lloyd’s for the global insurance industry, which assumes no business interruption policy wording fails. This is not a great outcome, in our view, but is easily manageable for QBE. We have not included benefits for motor insurance as it is still unclear what these could amount to given unstable mobility patterns, such as a possible spike in driving from return to work. The biggest risks we see are 1) a worse-than-expected economy, or 2) failings in the wording of some business interruption policies relating to pandemics.
We expect COVID-19 to have significant impact on underwriting profits for QBE over the next three half-year results. We estimate US$700m in total as ‘one-off’ COVID-19-related costs over the next 18 months to reflect this: US$200m in June 2020, US$225m in December 2020; US$270m in June 2021.
Despite most of the adjustments being negative, we note the pricing environment has accelerated further – which should support underwriting profits beyond FY20 given most insurers have taken sharp asset and liability hits – and the capital position base is strong.
In our view, the current low share price provides a buffer for investors, implying a 30% discount to adjusted discounted cash flow valuation adjusted for losses. We see less than a 30% chance of a catastrophic outcome for the company from economic and business interruption risks.
We maintain our Accumulate recommendation, while we have cut our target price to $10.00 from $15.00 to reflect earnings pressures from COVID-19 and lower yields.