QBE takes Covid-19 actions, with capital raising & catastrophe reinsurance top-up

Australia headquartered global insurance and reinsurance group QBE has announced a range of actions being taken to shore up its regulatory capital as a direct response to the Covid-19 pandemic, including buying more catastrophe reinsurance to reduce its exposure to U.S. perils.

QBE sees itself as exposed as anyone to the global Covid-19 coronavirus pandemic and is seeking to increase its regulatory capital levels to prepare itself to continue serving its customers in the face of potential economic and investment market impacts.

The re/insurer notes that the Covid-19 pandemic has “created unprecedented economic and investment market uncertainty.”

As a result the company is taking “pre-emptive and decisive action” which will lift its regulatory capital up to around 1.9 times its prescribed capital amount (PCA) , from the current 1.6 times PCA.

Among these actions is around US $825 million of capital raising, through a US $750 million equity issuance and a share repurchase plan of up to an additional US $75 million.

As well as this and other additions of US $400 million of tier 1 capital, there are reinsurance enhancements as well, as QBE has decided to better protect its balance-sheet through this year to buffer itself against the potential downside created by a coronavirus related global recession.

The insurer has already made a change to its catastrophe reinsurance program, adding protection to better insulate itself against large crop hail loss events.

This arrangement will see QBE ceding 90% of its crop hail exposure to unspecified sources of reinsurance capital.

In addition, QBE will buy more catastrophe reinsurance specifically to reduce its exposure in the United States.

The insurer said that it will lower the retention on its Group North American peak peril catastrophe reinsurance arrangement from US $275 million to just US $150 million.

The effect of this is expected to be a significantly lower chance of QBE materially exceeding its US $550 million annual catastrophe allowance, so adding more protection to its balance-sheet capital.

QBE is the first to announce that it has an increased appetite for catastrophe reinsurance protection as a direct result of the pandemic, given being better protected at a time when your balance-sheet capital is at-risk from many angles is the prudent step to take.

Our recent survey on the insurance and reinsurance market implications of the coronavirus (full results available here) found that more than 30% of respondents said that they expect to have an increased appetite for buying reinsurance as a result of the pandemic.

On top of the reinsurance purchases, QBE has also entered into a loss portfolio transfer on around US $300 million of North American excess & surplus lines reserves as another way to better protect its core capital and balance-sheet.

QBE said that on the investment side of its business, the first quarter drove a negative -2% return which is nearly US -$500 million due to “extreme volatility across all asset classes including a material increase in global fixed income credit spreads and significant declines in equity markets.”

As financial market declines dent global insurance and reinsurance firms and with the expectation being that a global recession could be twice as deep as 2008, albeit perhaps shorter, it is no surprise that bolstering reinsurance provisions will become a strategy for some.

As ever, the question is how much is enough, when it comes to capital raising. But by increasing its buffers on catastrophe reinsurance, QBE is insulating its balance-sheet from economic impacts at a time losses may make a more significant hit to its capital adequacy, which could already be eroded by other factors.

There’s a strong likelihood that we see heightened demand for reinsurance as the peak catastrophe season in the United States approaches, while other regions may also see increased demand for protection as the effects of financial market declines and a recession bite.

QBE hopes its actions will position it, “To withstand a range of severe economic and investment market downside scenarios while continuing to support customers, business partners, staff, shareholders and the community more broadly.”

QBE CEO, Pat Regan commented, “Despite the extraordinarily difficult landscape, QBE commenced the year with strong pricing momentum and underlying premium growth. The capital plan we have outlined positions us to navigate this period of extreme uncertainty with demonstrable strength and gives us the flexibility to pursue organic growth opportunities that may arise over the medium term.”