QBE investors were left gobsmacked on Monday morning when the company announced a profit downgrade of more than $500 million on market expectations, a downgrade of more than 30 per cent on its forecast insurance margin, a $500 million capital raising and a $1.1 billion run-off on a portfolio of claims in the US.
QBE’s new boss, John Neal, began a teleconference by apologising to shareholders for the decision to further downgrade insurance margins. Mr Neal played up the effect of superstorm Sandy, attributing it to an estimated retained loss of between $350 million and $450 million.
Three weeks ago, the company reconfirmed to the market that its insurance margin would be 12 per cent. Sandy was yet to hit at that time, but the storm does not explain the entire downgrade and why the company did not realise things were deteriorating.
The company’s profit is expected to be in excess of $1 billion for 2012, which is well below market expectations of more than $1.5 billion.
QBE fessed up to further provisions in its US business, including a deterioration in its US crops business and other large individual risk and catastrophe claims. The company estimates total large individual risk and catastrophe claims, including provisions for specific incurred but not reported claims, of $1.89 billion for the year. This is equivalent to 12 per cent of net earned premium. An amount of $380 million has been allocated for claims that may emerge from prior years.
Last month, a group of analysts went on a roadshow with QBE to the US and Europe, during which a number of them painted a rosy future for the company’s US operations. Not surprisingly, more than one has been left wondering why the company did not flag what was going on, particularly in its decision to run off some claims in the US.
At the time of the roadshow, one analyst at UBS had a 12-month share price target of $14.90 on QBE stock. After its announcement, QBE is now trading at a tad over $11 a share. Ten minutes into trading, the stock had fallen 12 per cent to under the $12 mark.
The problem with QBE is writedowns and downgrades have become a recurring theme. Its profit margins have fallen from a peak of 22 per cent in 2006 to the latest forecast of 8 per cent. The company had forecast an insurance margin of 12 per cent for 2012.
Last year, it reported an insurance margin of 7.1 per cent, after two of the worst years for insurance companies in more than 40 years. Catastrophes included Queensland storms, Victorian storms, earthquakes in New Zealand, cyclone Yasi and eight catastrophic tornadoes in the US.