QBE shaken

Given the enormity of what is happening in Japan, it seems a little trivial to be tracking the possible effects on Australian shares. The greatest concern will be the long term impacts on the world’s third largest economy and one of the power houses of the Asian region. Japan is a heavy consumer of Australian raw materials, although the disaster could cut both ways – there may be heightened demand because of the reconstruction process.  The Australian insurer QBE may be adversely affected, according to Deutsche Bank (see report). The broker has only downgraded the stock to a hold, however. The company’s exposure is in part limited because insurance cover is hard to get in Japan.

The Deutsche report says:

Earthquake cover is not automatically provided to homeowners in Japan given the high risk/cost. It is estimated residential penetration is only 13-17% (AIR) with low penetration in commercial and industrial lines. Where this cover is provided, much is ceded to the Japanese Earthquake Reinsurance (JER) scheme where the Government covers a significant proportion of the risk. For the 1995 Kobe earthquake which resulted in US$100bn of economic losses, insurance losses were only US$3bn.

QBE has exposure to Japan through its Lloyds operations. Of the US$106bn of P&C GWP in Japan in 2009, the Lloyds market wrote only $680m or 0.65%. We understand QBE carries Japanese earthquake risk exposure in its Lloyds umbrella syndicate 2999 through underlying reinsurance syndicate 566 and Marine & Energy syndicate 353. Jointly, syndicates 566 and 1066 accounted for £725m or 70% of 2999’s £1039m GWP in 2009.

Deutsche projects that QBE’s projected loss of US$125 million is well within its budget of US$1.65 billion. The response will no doubt be higher premiums, across the industry. QBE is a global player, considered to be well managed. This is what Morningstar Equities had to say before the Japanese earthquake hit:

QBE is one of the best managed insurance groups in the global general insurance and reinsurance industry. An enviable track record of strong earnings with a minor blemish following the events of September 11, 2001 is testament to a first class business model and conservatism. Extensive risk management is in place to protect all stakeholders. Throughout QBE diversification is used to reduce the overall risk profile by spreading exposures by product and geography. Overlaying fundamental procedures and strategies is a level of prudence providing significant comfort. A growth strategy based on the combination of organic growth and insightful acquisitions has and should deliver well above average growth in earnings and dividends. QBE is an excellent stock for inclusion in long term growth portfolios.

Japan is a financial world of its own – its massive debt levels are owed to itself – and is skilled at adapting its economic system to meet specific ends (what it is poor at is letting the economic system develop in a healthy fashion by itself). It should deal efficiently with the disaster. But another question remains: is the insurance sector a place where investors want to be? If global warming results in more weather volatility and disasters, the whole insurance and re-insurance system is likely to come under stress.

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