Catastrophe-hit QBE issues profit warning

Australian insurer QBE has warned that its profit after tax for 2011 will be down by between 40% and 50% on the previous financial year.

The profit drop has been caused by the insurer’s share of the heavy catastrophe losses in 2011, including earthquakes in New Zealand and flooding in Australia, and unrealised losses on its investment portfolio.

QBE also estimates that its insurance profit margin – underwriting result plus investment income as a percentage of net earned premium – would fall to between 7% and 7.5% from previous projections of 11%.

The insurer said its catastrophe and large individual risk allowance had increased to 15% of net earned premium from 13%. This means catastrophe and large claims will be US$1.2bn (£780m) higher than those in 2010. Of this amount, US$500m relates to catastrophes towards the year end, including the floods in Thailand, storms in Melbourne and Hurricane Irene in the USA.

QBE also revealed it had made US$160m of unrealised losses on its fixed-income investment portfolio because of rising credit spreads, and US$200m of unrealised losses resulting from a fall in the risk-free rates used for discounting outstanding claims provisions.

QBE chief executive Frank O’Halloran said in a statement that while most insurers and reinsurers had suffered similar fates because of catastrophes and tough investment markets in 2011, Australian companies’ results looked worse because of their requirement to discount claims using risk-free rates and record unrealised investment losses in the profit and loss account.

However, he still expects QBE to report an underwriting profit for the full 2011 year. “Our combined operating ratio is still expected to be around 96.5%, which we consider a strong underwriting result given market conditions,” he said.

O’Halloran was also sanguine about the 2012 year of account. “We are targeting a combined operating ratio of 89% with an underlying insurance profit margin around 15% for 2012 on the back of the premium rate increases, our comprehensive reinsurance protections, other changes to our business and current interest yields,” he said.

The 2012 targets assume a catastrophe allowance of 10% of net earned premium and a yield on QBE’s cash and fixed income portfolio of 3%.

QBE also reported that the 2011 losses had pushed up its 2012 catastrophe reinsurance bill by around 5%. The total cost of reinsurance protections, of which 60% is proportional and US crop reinsurance, is expected to be below 12.5% of gross earned premium in 2012.