INMAG-FEB12-2:page layouts
7/2/12
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“Their business risk has changed through acquisition. It seems that, indirectly at least, these acquisitions have put them into business lines which carry more cat risk.”
Reuters
– Deutsche Bank analyst Kieran Chidgey
Crop failure in the US: farm losses experienced by QBE “only happen once every seven years”
“The aura of QBE management has been damaged,” Credit Suisse analyst John Heargerty said. “QBE has only got one or two ‘outperform’ ratings on their stock, which for QBE is unheard of over the past decade.” Right until QBE delivered its profit warning, Merrill Lynch was telling the market – which considered the second half of last year the more benign – to expect an after-tax profit of $US1.56 billion. Instead, QBE will lodge less than half that. To say the market was blindsided would be an understatement. “It’s difficult for investors to get their head around the profit drivers for a company with such large global reach,” Merrill Lynch senior analyst Andrew Kearnan says. The timing of QBE’s profit announcement was also curious. Hurricane Irene struck the North American continent in late April, while flooding in Bangkok and Thailand’s Chao Phraya and Mekong River basin had mostly dissipated by November. Yet in October, nearly two months after the first floodwaters reached Muang Nong Khai municipality in northern Thailand, QBE was telling investors it remained on track for an insurance margin of 11-14%. That has now been slashed to 77.5%. “The market expected them to have a good grasp on their losses by December,” Mr Chidgey told Insurance News. “We haven’t seen this kind of volatility in their [catastrophe] numbers before, and it does make the market question just how good their reinsurance numbers are.” If 9/11 was QBE’s D-Day, 12/12 could well be its Bay of Pigs. More than 32 million QBE shares changed hands on the Australian Securities Exchange as the company’s share price dived by $2, wiping $2 billion from its market capitalisation. It was the insurer’s worst single day of trading since the collapse of the World Trade Centre. QBE lost money in three key areas. While rising credit spreads wiped $US160 million and unrealised losses from discounting outstanding claims cost another $US200 million, it was an uninsuranceNEWS
February/March 2012
precedented level of natural disasters –– and QBE’s exposure to them – which burned a hole through its chequebook. “We thought our initial allowance at the beginning of the year… was conservative, given the past seven years,” Mr O’Halloran said. “However, events in 2011 have proven otherwise.” In Mr O’Halloran’s defence, natural disaster losses are now approaching stratospheric levels. Local and international insurers have all suffered, and QBE is not the only insurer to be buffeted by unfavourable winds. Global insurance losses in 2011 are estimated between $US103-107 billion, the highest or second-highest on record depending on the source, and are nearly three times insured losses from the previous year. In this environment, QBE’s combined operating ratio (COR) – a measure of underlying insurance profitability – of 95.7, contrasted with the 100-plus CORs of Lloyd’s, Aviva and RSA – comes across as a risk management masterstroke. In Australia, the Insurance Council of Australia says insured losses were $4.9 billion in 2011. That’s an all-time record and more than double the losses sustained in 2010 – and an astounding 12 times higher than the losses of a decade ago. Rival insurer Suncorp will pay out at least $200 million from the Christmas Day hailstorms in Melbourne, and its natural hazard costs are now at least $120 million over allowance. Wesfarmers Insurance’s earnings before interest, tax and amortisation for the half year to December 31 will be down 67%, while IAG has been forced to lift its cat reinsurance cover by more than $100 million. Insurers are also struggling to pass on cost pressures through rises in commercial premiums. While analysts have seen increases in certain catlinked lines, most speak of a “two-speed” economy where rate rises above 5% are rare. Many clients are simply choosing to increase their excess rather than pay more in premiums. While investors wreaked havoc on QBE’s share price, the sharemarket was comparatively merciful 15