A record year for natural disasters has caused insurance giant QBE to issue the year’s first major profit downgrade, sending its shares to a near eight-year low.
QBE’s sizeable exposure to floods in Thailand was a major factor in the surprise downgrade, along with bushfires in Western Australia and Victoria’s Christmas Day storms.
“The record level of catastrophes is something that we didn’t budget for,” chief executive Frank O’Halloran told analysts.
The latest natural disasters generated more than $US500 million in claims, taking QBE’s full year allowance for natural perils claims to about 15 per cent of its earned premium, or nearly $US2.3 billion.
As a result, the insurer expects its profit after tax for calendar 2011 to fall by 40 to 50 per cent from 2010’s $US1.28 billion.
Analysts had been forecasting a rise in annual profit.
The downgrade shocked investors, with QBE shares dropping by as much as 30 per cent immediately after its announcement.
They recovered slightly to close $1.65, or 12.7 per cent, weaker at $11.35 – their lowest closing price since May 11, 2004.
“We certainly are disappointed because we pride ourselves in the way we manage our insurance business for our shareholders, and how we have regularly outperformed in a highly competitive market,” Mr O’Halloran said.
“And my gut feeling is that we will outperform in 2012.”
QBE’s insurance profit margin, what it makes from issuing insurance policies, will be between 7.0 and 7.5 per cent for 2011, down from its most recent forecast of at least 11 per cent.
Dividends are also set to be significantly cut, with the final payout for 2011 expected to drop to 25 cents per share from 66 cents per share from the same period in 2010.
The downgrade marks a low point for a strong market performer over the last decade, City Index market analyst Peter Esho said.
“The number of catastrophes in such a short period of time have finally caught up to hurt the group’s bottom line,” he said.
QBE is a major international insurer, writing over one-third of its policies in the Americas, another 30 per cent in Europe, and the remainder in Australia and the Asia Pacific region.
In addition to the massive Queensland floods and New Zealand earthquakes, it was also exposed to Hurricane Irene, tornadoes, wildfires, and snow storms in the US, plus riots in Europe.
Premiums have begun to rise rapidly, and the company has moved to cut its exposures in some areas, Mr O’Halloran said.
QBE has targeted an underlying insurance profit margin of about 15 per cent for 2012, based on increases in premiums, new reinsurance protections and other changes to its business.
Recently finalised reinsurance protections are expected to come at a cost of about five per cent higher than in 2011.
But a horror 2011 has forced QBE to take a conservative approach for the year ahead.
“The one thing we are doing is not assuming that 2011 will not repeat itself in 2012,” Mr O’Halloran said.
