The 30% slide in the price of QBE shares this year now has an explanation, at last.
An update from the company yesterday revealed a sharp drop in forecast first half profit, which knocked the shares down by more than 6% at one stage.
The shares fell $1 at $16.97, down 5.5% for the day. They hit a 12 month low of $16.80 during trading.
They had started 2010 at $25.40.
In fact QBE shares have not been as low as they were yesterday since late 2005.
QBE told the market that it expects a 40% fall in first half earnings because investment income was cut by the market turmoil in May and June and the continuing slump in interest rates, especially on US, UK government and other high-rated debt.
"Preliminary gross investment income on shareholders’ funds when compared with the same period last year has been adversely affected by net realised and unrealised equity losses of US$228 million (2009: US$102 million loss) and the first half of 2009 had one off gains on foreign exchange and repurchase of debt of US$174 million and US$46 million respectively," the company said in yesterday’s statement.
The extent of the slump in interest rates on QBE’s accounts was shown by the disclosure that income from fixed interest, short term money and cash fell 35%, or $137 million, to $246 million in the latest June half, from $383 million in the same period of 2009.
QBE holds much of its shareholder funds and other cash reserves in high grade, low risk debt, such as US treasuries.
Yields on those have dropped sharply, with the yield on the two year Treasury bond now around 0.60% and close to all time highs. Yields on three month T-notes are around 0.15%. UK gilts have also seen yields fall sharply.
As a result, net profit after tax is expected to be down by around 40%.
The company’s shares, which have been under pressure all year, slumped $1.17, or 6.5%, to a day’s low of $16.80 before they bounced back over $17 where the ended at $17.07, a loss of 90c, or 5% on the day.
QBE, which is Australia’s largest insurer by market value, said first-half profit would come in at $US432 million ($482 million), down sharply from $US720 million this time last year.
"The continued excellent underwriting results have been more than offset by significantly lower investment income from reduced interest yields, the fall in equity markets and one off gains in the first half of 2009," chief executive, Frank O’Halloran, said in a statement.
Despite the expected earnings drop, QBE said half dividend was expected to be maintained at 62c a share, as cash flow remained strong.
The insurer says it was still on target to achieve operating cash flow of more than $US2 billion ($A2.23 billion) for the full year.
QBE also said in yesterday’s preliminary results statement for six months to June 30 that it would now be reporting its financial results in US dollars from this year, but paying dividends in Australian dollars.
The company said that the adoption of US dollars as a presentation currency was more relevant for QBE given about 75% of its business was now written in 48 countries, and over half of its premium income was made in US dollars.
When expressed in the US dollars, QBE expects a 20% rise in first half gross written premium, to $US6.9 billion, while net earned premium .will be up 19% at $US5.2 billion.
Australian operations are expected to deliver the strongest growth in premium income, up 26% when expressed in Australian dollars.
Asia Pacific is expected to deliver 15%, the Americas 13% and European operations 5%.
"Acquisitions and other initiatives for 2010 to date are projected to add around US$400 million of net profit after tax and around US$2.3 billion of new gross written premium annually by 2013.
"Capital adequacy at 30 June 2010 is expected to be around 1.6 times APRA’s minimum requirement," QBE said.
"Yields for the half year have been particularly impacted by credit spread volatility and lower yields on our substantial US dollar, sterling and euro cash and fixed income investments totalling US$14 billion, mainly required to match the currency of our liabilities.
"The portfolio remains of high credit quality. Investment income on our policyholders’ funds, mainly comprised of fixed income and cash securities, was impacted by lower yields, although operating foreign exchange gains have assisted us in exceeding our target of a 3% gross yield on assets supporting policyholders’ funds.
"QBE’s cash and fixed income investments remain short on the yield curve.
"This means that insurance profit will benefit from rising interest rates when they occur especially in the US, UK and Europe. We are currently reviewing the potential for increasing our exposure to term deposits with well capitalised banks.
"Our equity portfolio is approximately 6.5% of total investments and cash. QBE achieved a negative 12.4% yield on equities for the half year compared with the negative 11.4% for the Australian All Ordinaries index, with the underperformance mainly due to our strategic investment holdings, " QBE said.
