Why QBE Insurance Is Down 4.20% after Flagging $130 Million in Savings

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Australia’s third largest insurer has shed 4.33% of its share price at the beginning of trade this morning. QBE Insurance Group Ltd [ASX:QBE] dropped 45 cents today, currently trading at $9.94, despite this morning’s announcement of the company saving $130 million from a three-year operational efficiency effort.

QBE is an international general insurance and reinsurance group that underwrites commercial and personal lines of business through operations across the globe.

How much is QBE really saving?

Despite what should be positive news for investors, QBE’s share price has dropped into a steep, downwards December trend, as you can see below.QBE trading view

Source: Trading View

Along with its savings announcement, the company is also lined up to receive increased profits in 2019.

The company has also implemented a simplification agenda — recently selling its insurance operations in Puerto Rico, Indonesia and the Philippines.

In a statement released to the ASX today, QBE said it is moving to a more conventional reinsurance structure, with increased catastrophe protection that will hopefully deliver better profit outcomes in extreme catastrophe years.

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While the 2019 program is expected to save the company around $125 million in reinsurance costs, these savings will likely be offset by an increase in budgeted allowance for large individual risk and catastrophe claims. QBE estimates this figure will grow from $1.2 billion currently, to $1.4 billion.

QBE expects its program will achieve higher overall profitability in 2019, but it seems investors aren’t sharing the same optimism.

Although, this doubt isn’t surprising, seeing as investors’ appetite for risk has cooled considerably over the past few months. A hike of $0.2 billion in budgeted risk is hardly the confidence booster investors are currently looking for.

What’s next for QBE

The QBE share price has hit a four-month low as the embattled financial sector continues to lose ground amid poor investor sentiment. The December drop for QBE has wiped out all gains made for the year, currently posting a -7.31% one-year return.

Other insurers, such as Insurance Australia Group Ltd [ASX:IAG] and Suncorp Group Ltd [ASX:SUN], have all followed similar a trend, which is likely to continue as investors saddle in amid growing speculation of a bear market.

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Despite selling off some of its troubled Latin America segments earlier in the year, QBE has still struggled to generate sustainable profit.

Credit Suisse analyst Andrew Adams argues that QBE investors may have dodged a ‘big earnings’ downgrade this morning with the cost cut announcement. However, it is predicted that QBE’s profit guidance for 2019 is likely to be $50 to $100 million lower.

In an increasingly expensive climate here in Australia, it will be difficult for QBE to create an economic stronghold, especially in an industry as competitive as insurance.

Success in 2019 for QBE will depend strongly on whether its cost savings will be enough. While the company is targeting gross savings of $200 million over three years and a $95 million price tag, analysts are still divided on whether the program will deliver.


Ryan Clarkson-Ledward,
For Money Morning

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About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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