One of the worst performers on the ASX 200 on Tuesday has been the QBE Insurance Group Ltd (ASX: QBE) share price.
In early afternoon trade the insurance giant's shares are down almost 4.5% to $9.94.
Why are QBE Insurance's shares sinking lower today?
This morning QBE Insurance released a market update which revealed that it has completed its portfolio simplification agenda with the sale of its insurance operations in Puerto Rico, Indonesia, and the Philippines.
In addition to this, it advised that it has fully placed its 2019 reinsurance program and revealed plans for a three-year operational efficiency program targeting net cost savings of $130 million and an expense ratio of around 14% in 2021.
While the cost savings were not as great as many had expected, I suspect the finalisation of its 2019 reinsurance program could have also led to its shares sinking lower today.
Management believes that its 2019 reinsurance program "strikes an appropriate balance between cost, balance sheet protection, capital strength and earnings volatility."
It has done this by significantly reducing its catastrophe retention, increasing its protection against catastrophe severity, reducing large individual risk claim retention, and increasing its quota share protection to further reduce claims volatility.
While the 2019 program is expected to save around $125 million in reinsurance costs, it is expected to be offset by an increase in the budgeted allowance for large individual risk and catastrophe claims to around $1.4 billion. This compares to its current budget of $1.2 billion currently and is due to greater variability around reinsurance recoveries.
This is expected to result in a profit headwind of around $50 million to $100 million, though management is "confident of achieving an improved combined operating ratio and higher overall profitability in 2019 compared with 2018, underpinned by the premium rate increases we are achieving, expected ongoing improvement in the Group's attritional claims ratio and the recently commenced efficiency program."
Should you invest?
While I think QBE Insurance's cost savings plan is a big positive and its reinsurance program makes a lot of sense, I'm just not a fan of insurance companies due to the unpredictability of their business models.
It is for this reason I plan to avoid QBE, Insurance Australia Group Ltd (ASX: IAG), and Suncorp Group Ltd (ASX: SUN) and focus on other more predictable areas of the market.
