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Australia's QBE Insurance mulls LatAm exit in bid to restore profitability

QBE Insurance Group Ltd. is moving forward on the sale of its struggling Latin American operations, as the Australian insurer strives to become leaner and more profitable.

QBE has begun hiring investment banks, including Morgan Stanley, to advise on the potential sale of its Latin American operations, The Australian reported Jan. 31. The insurer announced a strategic review of the operations in August 2017 "to simplify and reduce risk," after it started the process in the region, which has been a drag on earnings, by off-loading its nonlife business in Chile in May for an undisclosed sum.

The appointment of investment banks comes after the Sydney-based insurer, which recorded US$8.04 billion in gross written premiums for the first half of 2017, announced that it expected a US$1.2 billion loss for 2017, citing significant catastrophe claims in the fourth quarter and continued weakness in Latin America and parts of Asia-Pacific.

SNL Image
QBE CEO Patrick Regan
Source: QBE

Investors have been calling on the insurer to focus on restoring profitability instead of expansion; shedding non-core assets is one way to achieve that, according to industry experts speaking with S&P Global Market Intelligence.

The group's Australian and European businesses are expected to report an underwriting profit for 2017 while the North American, Asian and Latin American divisions have indicative combined operating ratios — that is, claims and costs as a share of premiumsof more than 100%, a level that implies underwriting losses.

'Clean up the mess'

In the Jan. 23 announcement, QBE said the underwriting business across all regions reported a loss in 2017, with an estimated combined operating ratio of about 104%.

Its operations in Latin America and Asia-Pacific, excluding Australia and New Zealand, posted the weakest performance, with combined operating ratios of 114% and 115%, respectively, the company added.

In 2017, QBE's half-year report noted that its Latin American and Asia-Pacific operations were hit by "significantly higher than expected claims activity." The emerging markets business, which comprises its Latin America and Asia businesses, contributed US$857 million in gross written premiums for the first half, or 11% of QBE's global total.

"Over a long period of time, they grew the business by acquiring insurers in different parts of the world, in different insurance sectors," said David Ellis, a senior equity analyst at Morningstar Inc. "They grew too quickly and over the last five years, they have been trying to clean up the mess."

The analyst expects Pat Regan, who became group CEO at the beginning of 2018, to continue cutting costs and exiting unprofitable businesses. "The global businesses will shrink but on the other hand profitability should improve," Ellis added.

Apart from the sale of Chilean assets, another recent foreign divestment was QBE's deal to sell its stake in a Thai unit to King Wai Group (Thailand) PCL for an initial purchase price of 815 million baht. The deal is pending approval from King Wai Group’s shareholders.

QBE has also been scaling and restructuring in North America. In the U.S., the company exited the distribution business in 2015 after selling its agency business for about US$300 million. In the same year, QBE sold its U.S. mortgage insurance business for US$90 million.

Over the past two years it also executed two loan loss transfers to reinsure its nonlife businesses in the U.S., taking them off its balance sheet.

As for future deals, analysts say it is too soon to gauge who potential buyers of the Latin America assets might be, adding that QBE is unlikely to be greatly affected by the absence of Latin America in its global portfolio of businesses.

"Latin America’s gross written premiums were a little over half the emerging market business," noted Craig Bennett, a credit analyst at S&P Global Ratings. "In summary, the Latin America underwriting contribution was negative and insurance profit was not material to the group. On a headline gross written premium it's small as well."

Nor should a departure from Latin America suggest an end to QBE's global ambitions, said Omkar Joshi, a portfolio manager at Regal Funds Management that does not own any QBE shares. Or at least, he said, the insurer is unlikely to radically shrink its global footprint along the lines of what Australia & New Zealand Banking Group Ltd. has done in recent years. To boost capital ratios and focus on its core domestic business, ANZ has been divesting various holdings in Asia-Pacific, including life and investments products in Australia and New Zealand.

"In terms of Asia, I think [QBE] is fairly committed to that region for now. I don't think there's a big line of assets they're looking to sell. It's not quite an ANZ story,” he said.

As of Feb. 8, US$1 was equivalent to 31.85 Thai baht.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.