Shareholders dump QBE on profits shock
INVESTORS in Australia's biggest insurer, QBE, dumped the stock on Monday after deepening woes in its North American business forced it to slash profit forecasts and raise $500 million in capital.
Shares fell 12 per cent in the first 10 minutes of trade, before closing down 8 per cent at $11.80.
QBE's new boss, John Neal, apologised to shareholders for the shock news after confirming three weeks ago that the company's 2012 guidance was on track.
Sandy has produced a $US450 million bill for QBE. Photo: Reuters
During a teleconference on Monday morning, Mr Neal said the $US20 billion-plus superstorm Sandy, which wreaked havoc in the United States on October 29, could cost QBE between $350 million and $450 million.
''I apologise to shareholders. The decision was taken after a thorough revision at the end of October,'' he said.
Mr Neal, who became CEO in August after Frank O'Halloran stepped down, warned that the group's insurance margin for 2012 would fall to 8 per cent, from a previous guidance of more than 12 per cent.
He said on Monday QBE's net profit before amortisation for 2012 would be more than $1 billion, which is well below market forecasts of $1.75 billion.
After amortisation, this translates to a net profit of tax of more than $820 million, against market forecasts of $1.5 billion.
Mr Neal said the group had reorganised its North American division, which had resulted in more than $1.1 billion of claims reserves being put into run-off. This resulted in a $180 million top-up on its claims provisions.
He said a team had been set up at the beginning of July to review each of 6000 claims in the run-off portfolio.
''I think we felt that we could have coped with any very small deterioration had we had a very benign catastrophe year,'' he said.
''It's been three months to complete the exercise.''
Goldman Sachs analyst Ryan Fisher said the downgrade was disappointing ''on many fronts''. '''The top-up to US provisions is at odds with previous denials of any issues in that regard,'' he said in a note to clients.
Monday's announcement was the latest in a series of warnings from the company of problems in its US division. BBY analyst Brett Le Mesurier wrote in a note last month that the company had warned some business was underperforming as far back as 2010, repeating the warnings last year and in the first half of this year.
A key problem is its Praetorian division, where up to 6000 claims have been put into run-off. Mr Neal's predecessor Frank O'Halloran bought Praetorian in 2007 for $US800 million promising it would add $US1.4 billion to gross premium income. Mr O'Halloran made more than 100 acquisitions during his 14-year reign as CEO.
Mr Neal announced on Monday a $US500 million convertible note capital issue to shore up the company's balance sheet by repaying short-term debt and recapitalising the US business. He said the new notes would be classified as equity for regulatory purposes under the Basel III rules.
QBE chief financial officer Neil Drabsch said that at the end of the financial year QBE's gearing would be about 40 per cent.