QBE NA takes more prior-year pain as it pulls back from E&S and pivots to retail

QBE recorded $190mn of adverse prior-year development in its under-performing North America unit in its H2 results, including $70mn on a discontinued habitational portfolio amid what sources have described as a wider withdrawal from E&S brokerage business as it repositions its book.

The latest pain in the carrier’s North American business was highlighted by CFO Inder Singh on QBE’s earnings call earlier today.

“The main disappointment in North America was obviously the adverse prior accident year development,” said the executive.

The $190mn added in the second half of the company’s financial year took the total reserve charge in North America to $305mn for 2020, equivalent to 9 percent of earned premium.

Singh said the full-year adverse development related to four main areas.

The first was the $70mn strengthening of reserves for the discontinued E&S portfolio.

“This is a book of business from a couple of years ago where, with the benefit of hindsight, we didn’t have the necessary expertise and ended up with a portfolio of largely habitational business that wasn’t well underwritten or appropriately priced,” he commented.

A further $60mn of adverse development related to general aviation, where a single large claim involving a private jet that led to significant loss of life and substantial property damage had seen a “surprise finding” of pilot error rather than engine failure, said Singh.

Another $30mn of the additional reserving related to deterioration on 2017 catastrophes, primarily Hurricane Irma.

“And lastly, we’ve made an additional explicit provision of around $100mn to address more systemic issues such as social inflation and the potential for higher severity loss trends in casualty lines,” said the QBE CFO.

Also on the call, interim group CEO Richard Pryce acknowledged the failings of the North American business in the past.

“I probably don’t need to remind you but 2020 is not the first year that North America has experienced adverse development.

“Have we got it all? And can we guarantee there won’t be any further adverse development? The short answer is no, I can’t give any guarantees. But what we’ve done is the best job we can,” he said.

The executive said that the $100mn provision combined with improved new business quality and strengthened accident year loss picks has “reduced the risk materially”.

Pivot to retail

Pryce also pointed to the pivot in the North American business as he acknowledged QBE had not done a very good job of running the platform for several years.

“So we’re acutely aware that we need to make progress and more quickly [and] more sustainably than in the past,” he said.

That includes making the right loss picks, and growing in areas it can control, he said.

Pryce noted the recent hiring of a team from Berkshire Hathaway Specialty Insurance to expand its financial lines business, and an initiative to build out a retail-focused business that would be more middle market oriented, in the “heartland of the Travelers and the Allstates”.

He described that market as “massive” as well as more predictable and less cat-exposed than some other sectors.

The executive said QBE would also stick to what it’s good at, in areas like specialty programs and casualty.

The comments about repositioning the book towards retail come after broker sources in the US have suggested in recent weeks that QBE has effectively pulled out of segments of the E&S brokerage market.

QBE had hired Jude DiBattista in 2016 from Aspen to head up its E&S P&C business, but the executive left last year to take up the position of chief casualty underwriting officer for brokerage at Nationwide.

The repositioning of QBE North America is being led by the unit’s CEO Todd Jones and president of specialty and commercial Tom Fitzgerald. The executives joined after US leadership roles at retail brokers Willis Towers Watson and Aon respectively.

The division reported an improved underlying combined ratio for 2020, narrowing from 103.7 percent to 100.3 percent. But the impact of cats, prior-year development and Covid-19 sent the reported calendar-year combined ratio up 10.1 points to 115.7 percent.

The attritional ratio improved by 2.4 points to 46.3 percent. Top line grew by 13 percent to $4.78bn in North America.

QBE North America has previously been approached about its exit from the brokered E&S market but did not respond to a request for comment.