The QBE Insurance Group Ltd (ASX: QBE) share price slumped nearly 6% on Monday following an update relating to a decision handed down by the UK Supreme Court against the company’s business interruption policies.
QBE is an underwriter of general insurance and provides services mainly to its customers in Australia, North America, Europe and the Asia Pacific region.
The year 2020 was tough for QBE and its shareholders, with the share price still languishing near its March 2020 lows at around $8 per share. With the QBE share price this beat up, could this be a potential buying opportunity?
QBE share price chart
What happened?
As a result of the court’s decision, QBE’s FY20 result will include an additional $185 million risk margin strengthening – essentially money put aside used to pay out potential claims.
Like many other insurers, these are claims arising from COVID-19-related business shutdowns. The UK Supreme Court upheld a decision previously made in September that QBE was in fact liable for many of these claims.
However, despite this, the company expects its FY20 statutory loss will not differ materially from the guidance provided in December. This is because the risk margin charge will be mostly offset by higher than anticipated investment income and other favourable movements.
Regardless of what ends up happening to QBE’s bottom line, the decision isn’t a good sign for investors, with the hope of a partial dividend potentially fading away after continuous profit downgrades and write-downs over the COVID-19 period.
Is the QBE share price a buy?
I remember back in November last year, a similar court ruling affected Insurance Australia Group (ASX: IAG).
There are a few more examples of similar instances happening to other insurance providers. As such, while COVID-19 is still around, I’d expect issues like this to happen even more frequently, so insurance is probably not an area I’d want to be in at the moment.
There are some additional headwinds that make the insurance industry challenging in the current economic environment.
For starters, insurance is a highly regulated industry and there’s not too much pricing power in favour of these companies. In order to be compliant, APRA determines the required capital an insurer must hold in reserve to pay claims, which can affect the premium the insurer can charge.
Additionally, in a low interest rate environment, insurance companies can struggle to generate sufficient returns on the capital they invest with your insurance premium.
With interest rates set to be low for the foreseeable future, it’s a headwind that seems likely to stick around for a while.
For some alternative ASX dividend share ideas, check out this article: 3 ASX 200 shares to buy for income.
