QBE massive reserve charge should not indicate industry-wide trend: KBW

Risk managers will breathe a nervous sigh of relief at this news because it was the last significant bout of industry-wide reserve additions that led to a major global market hardening. International insurers and reinsurers were forced to boost reserves for mainly US liability lines that had been woefully underpriced in the mid to late 1990s by billions of dollars. Combined with the catastrophic losses of the terror attacks on the World Trade Centre and investment write downs for plummeting bond and equity prices the industry was brought to its knees.hideRates flew up across the board at year-end 2001 and beyond as the credit rating agencies dominated the news agenda. Risk managers eyed the security of their insurers nervously. High profile victims of the period included Reliance National, Gerling and Converium. When QBE announced that it expected to report a net loss of around $250m this year, caused mainly by claims provisions for prior year's underwriting and intangibles and goodwill write downs in North America, alarm bills will therefore have been set off for risk managers with a good memory. QBE said major items that contributed to the revised guidance include a prior accident year claims development of $650m. This incorporates a second half 2013 charge of $470m. This comprised around $300m in North American Program business and around $170m in what it described as 'other divisional portfolios'. Another cost was related to the restructure of the QBE Financial Partner Services (FPS) business, its specialist lender placed property insurer. This resulted in a one-time charge of $150m and write down of the remaining $330m of QBE FPS identifiable intangibles. Another contributor was a higher than expected increase in US crop claims. This pushed the combined ratio for this business up 11% against plan to an estimated 99%. The group also reported a goodwill impairment charge of around $600m, primarily in North America. Meyer Shields of KBW said that QBE's announcement does have a 'negative read-through' to other insurers and reinsurers, but added that there was no need to press the panic button. He pointed out that QBE is not alone in making a significant reserve charge for US business this year. Other insurers include National Interstate, Meadowbrook and Tower Group. But he clearly stated that KBW still views reserve deficiencies as a 'company-specific issue' rather than an industry-wide trend. A bigger factor than simple underpricing and reserving for competitive reasons (the traditional cause of reserving problems) at this point is inflation. Insurers that write liability business can only get away with charging low prices if inflation is low and that will not necessarily be the case forever, said Mr Shields. But again no need to panic now, he added. "If (probably 'when') inflation inflects, reserve problems will likely be more widespread, but we don't think it's a near-term issue now," he said. M&A activity is a likely cause of many reserving problems, pointed out the analyst. This logic suggests that if risk managers are worried about insurer security they should take a look at M&A track records. "We note that many or most of the companies with reserve problems are (or were) reasonably active acquirers. It's (probably) true that not every acquisition conveys reserve problems, but this news just reinforces our generally negative view of insurer M&A, especially when the acquired companies operate in mature markets exposed to longer-tailed lines of business," said the analyst. Any read through to other players in the market from the QBE news may, in the short term at least, be for those who write crop insurance and reinsurance. The KBW analyst said: "QBE's revised crop loss pick is likely to weigh on other leading domestic and Bermuda-based crop (re)insurers (notably ACE, AFG, ENH, PRE, RE, and others)...although it still seems clear that 2013 will end up a much better crop insurance year than 2012."

QBE massive reserve charge should not indicate industry-wide trend: KBW

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