Posted on Aug 23, 2011 by Sergio Ulloa
Australian insurance giant QBE has reported a significant rise in half-year profits, but have, at the same time, also been quick to downplay their full-year margin expectations due to the unprecedented string of heavy catastrophe claims incurred in 2011.
In a statement released to the Australian Stock Exchange, QBE posted a 53 percent rise in net profit for the six months of 2011 to June 30, up to US$673 million from the US$440 million reported a year earlier. The increase in QBE's half-year profits was primarily attributed to a substantial rise in investment income, which rose from US$116 million in 2010 to US$657 million, as the insurance group expanded its portfolio of corporate bonds. Premium revenue from recent acquisitions completed over the past year also exceeded expectations, and have been able to bolster the bottom line at a critical time to largely offset the sharp influx of severe natural catastrophe claims. QBE acquisitions so far this year have included including the American crop insurers, NAU Country and Renaissance Re, the Balboa insurance business, the Europe-based insurer Secura NV and CUNA Mutual from Australia. According to QBE, over the past six years over 90 percent of the insurer's growth in premium income has been achieved through its acquisitions
. QBE's gross written premiums were up 30 percent to US$8.9 billion, while the insurance group's net earned premium also increased 29 percent to US$6.78 billion. The Australian insurer's balance sheet has remained strong with excess capital of US$3.3 billion, 1.7 times the minimum requirement, leaving considerable flexibility to fund further acquisitions in the future.
QBE Chief Executive Frank O'Halloran asserted in the statement that the company would continue to look towards acquisitions to increase revenue and diversify its risk profile. "QBE's strategy to build product diversification and geographic spread by acquisition continues to be successful. We are particularly pleased with our recent US acquisitions which contributed strongly to the significant increase in profits from our US operations in the first half."
While QBE has been able to successfully expand and generate revenue from its overseas operations, the insurer's profit margin for the first half of the year fell from 15.8 per cent to 11.2 per cent, due to a record number of natural disaster claims that added 6.6 percent to the large individual risk and catastrophe claims ratio for the half year. The largest catastrophe and individual risk claims that have affected QBE relate to Cyclone Yasi and subsequent flooding in Australia, the New Zealand Christchurch earthquake, Japan's earthquake and tsunami
, and half a dozen major tornadoes that struck the United States in the spring
. Total insured losses went up US$250 million in June and already amount to US$1.08 billion for the year, matching 2010's total in half the time. The company has been forced to downgrade its insurance profit margin expectations to between 11 and 14 per cent for the rest of the year, down from a 15-18 percent forecast in June.
"The record level of catastrophes experienced by the worldwide insurance industry during the first half and the recent fall in risk-free interest rates necessitates that we lower our insurance profit range for the full year," QBE Chief Executive Frank O'Halloran explained.
The lower than expected insurance margin affected QBE share price in trading, dropping to a low of US$12.25 before the stock bounced to close down 5.6 percent at US$12.98. Indeed, the insurer's underwriting profit for the first six months of 2011 dipped by a remarkable 46 percent to US$291 million from a year earlier. Australia's largest insurance company would have suffered US$217 million in further costs from claims and reinstatement premiums this year if it had it not renegotiated its prime reinsurance protection contracts last year. Under their current reinsurance deal, seventy percent of all costs incurred will be fixed to the growth in premium income, with the only the remaining 30 percent being variable to inflation. Due to the current claims environment, QBE has taken out an additional US$150 million worth of reinsurance to cover for any further large risk and catastrophe claims over US$675 million.
The Sydney-based global insurer is confident that these extra costs can be absorbed by greater demand and more beneficial policy terms and premium rates for its own business, particularly in catastrophe affected areas. A close sequence of natural disasters can often become an earnings event for insurers as it ultimately makes more people aware of the importance of proper coverage. "We believe the pricing increases that we will get in the door will more than offset any price increases that we expect on the buying of that 30 per cent of reinsurance," Mr O'Halloran told analysts, adding in the statement that "our philosophy has always been that our reinsurers are entitled to a positive return on their commitment to QBE over time."
QBE, of course, have not been the only prominent property/casualty insurer to suffer through two quarters of sizeable catastrophe losses. Several multinational insurance companies, including Allstate and MetLife, have been forward with their concerns about the effects these increasingly prevalent natural catastrophes, not to mention the impending Solvency II requirements in Europe
, will have on the international insurance industry. Reinsurance companies have already begun lifting rates
on insurers to recoup their sizeable losses
and it is yet to be determined if these extra expenses can be passed on entirely to policyholders.
Insurance Companies Mentioned
QBE Insurance Group Limited is one of the top 25 insurers and reinsurers worldwide. Headquartered in Sydney, Australia, QBE operates out of 49 countries around the globe, with a presence in every key insurance market. The Americas Division, headquartered in New York, conducts business through various property and casualty insurance subsidiaries in eight countries.