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QBE Expects 50% Profit Hit on Record Catastrophe Losses

Source: A.M. Best

Posted on 16 Jan 2012

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QBE Insurance Group Ltd. said it expects a 40% to 50% fall in profit for the 2011 calendar year due to the impact of unusually high natural catastrophes losses along with investment losses.

"The record level of catastrophe claims in 2011 together with the difficult investment markets have impacted most insurers and reinsurers," said Frank O'Halloran, group chief executive officer of QBE, in a statement. The group's expected profit margin for 2011 is expected to drop to 7% to 7.5% from the original forecast of 11%.

QBE halted its shares trading at Australian Securities Exchange prior to the announcement of its 2011 preliminary results on Jan. 12. The pause in trading was mainly due to the results release, said a QBE spokesperson. Stocks trading was resumed right after QBE's announcement on 2011 financial performance and 2012 reinsurance arrangements.

QBE shares finished the trading day on Jan. 12 down 13% to A$11.35 (US$11.71).

The frequency of natural catastrophes continued at an unprecedented level in the second half of 2011, although second-half events attracted fewer headlines than those earlier in the year, said O'Halloran. In the United States, Hurricane Irene, tornadoes, wildfires, hail, flood and wind and snowstorms resulted in a large number of claims. "Our U.S. crop insurance business produced a below-average underwriting profit due to the severe hail and flood claims," said O'Halloran.

Bushfires in western Australia, storms in Melbourne, floods and riots in Europe and floods in Thailand also led to significant catastrophe claims. "Our initial allowance at the beginning of the year for large individual risk and catastrophe claims of 9% of net earned premium was conservative given the past seven years averaged at 8.1%," said O'Halloran. Natural perils claims are expected to be about 15% of net earned premium for 2011, up from the previous forecast of 13%.

The company has made a number of changes to lessen the impacts, including premium rate hikes for property lines, higher deductibles, the purchase of more reinsurance and reducing exposures in some areas. "We are targeting at a combined operating ratio of 89 with an underlying insurance profit margin around 15% for 2012 on the back of premium rate increases, our comprehensive reinsurance protections, other changes to our business and current interest yields," said O'Halloran.

QBE said "it has finalized the placement of its 2012 catastrophe and individual risk excess of loss reinsurance arrangements for an expected overall increase in cost of around 5%." Its total reinsurance cost, of which 60% is proportional and U.S. crop reinsurance, is expected to be below 12.5% of gross premiums in 2012.

The 2012 reinsurance cost includes US$400 million of aggregate covers for a frequency of large individual risk claims and catastrophes, US$200 million of reinsurance protection for the group's captive insurer, reducing the group's retention for a U.S. windstorm by US$50 million and additional catastrophe covers for increased exposures in Australia and the United States, according to QBE.

Difficult investment markets bought unrealized losses for the Australian group. QBE said it had to book unrealized losses of US$160 million on its fixed interest investment portfolio as a result of rising credit spreads. This was a requirement under Australian accounting standards, which charge mark-to-market movements to the profit and loss account. Also, QBE said it had to pass US$200 million on "unrealized losses from the substantial fall in risk-free rates that are used for discounting outstanding claims provisions."