QBE, the country’s biggest insurer, has once again underlined a very unpalatable fact – when it comes to meeting earnings guidance, it is a serial under performer.
After yesterday’s surprise write downs and big loss (and slide in underlying profit to $US850 million), the company has now failed to meet its full year profit guidance every year since 2009.
And, because of that reputation, investors punished the company yesterday, wiping 20% or $A4 billion off its market value.
A loss was expected from QBE after the company’s surprise suspension request on Friday, but the extent and size of the losses and writedowns (around $1 billion, which is an amazing amount of money) and the impact on earnings shocked the market.
So large was the surprise that QBE’s downgrade on its own more than offset the 25 point gain in the futures market from offshore trading on Saturday and the market started lower.
So it’s no wonder the shares fell from $15.45 on Thursday, before the trading suspension was sought on Friday, and around $12 at the close yesterday (down 22%), which is about where the shares were trading 10 months ago.
In fact back in 2007, QBE shares were trading around $35 each and have never been back. The insurance margin was a rich 22% – now it’s the reduced 6% (from the weak 11%).
Given all that, it’s no wonder that chairman Belinda Hutchinson is departing in March of next year to be replaced by Marty Becker, who is a recent appointment to the company’s board. Mr Becker, a former chief of US financial group Alterra Capital Holdings, joined the Australian insurer’s board just four months ago.
Ms Hutchison has been chair since 2010, when the company’s long campaign of aggressive acquisitions, especially in the US and European markets, started coming undone.
QBE told the market yesterday morning that it now expects to post a $US250 million loss for the 2013 financial year which ends on December 31, due to writedowns and increased claims associated with its North American business.
Excluding writedowns and house cleaning moves, QBE said it expects a cash profit of $US850 million, sharply down on previous guidance and on the $US1.020 billion earned in the 2012 financial year.
The news from QBE in yesterday’s statement was grim.
The company said the "Expected FY13 reported net loss of around $US250 million due mainly to claims provisioning and intangibles and goodwill write downs in North America; cash net profit after tax (NPAT) of around $US850 million (2012: $1,042 million)".
The company said the new guidance for the year to the end of this month has been "revised to a combined operating ratio (COR) of 97-98% and an insurance profit margin of around 6% on net earned premium of $15.2 billion". That margin is half what was expected.
"Major items contributing to the revised FY13 guidance include: 2013 financial year prior accident year claims development of $US650 million, including the second half of this year. A charge of $US470 million comprising the following: Around $US300 million in North American Program business; and around $US170 million in other divisional portfolios.
"Restructure of QBE Financial Partner Services (FPS) business, the specialist lender-placed property insurer, results in a one-time charge of $US150 million and write down of the remaining $US330 million of QBE FPS identifiable intangibles.
"Higher than expected claims increase US crop insurance by 11% (relative to plan) to an estimated 99%, 2013 risk margins strengthened by around $US200 million.
"Goodwill impairment charge of around $US600 million, primarily in North America Regulatory and rating agency capital ratios as at 31 December 2013 forecast to be above 30 June 2013 levels," the company said.
The problems in QBE’s US division have again hurt the company – this has been an on/off story now for the past couple of years.
The US business has been hurt by problems in its crop, lenders-placed property insurance and program businesses.
The crop arm has been hit by the worst US drought in over 50 years, while its lenders placed business has been suffering reduced premium and limited opportunities to win new banking clients. That’s despite the strong recovery in sales of existing homes and the construction and sales of new homes.
CEO John Neal said in a statement (and apologised to investors for a third time since becoming CEO at a briefing for media):
"We have increased our provisions for prior accident year claims and will write down identifiable intangibles and other assets being held by our US lender-placed business and also goodwill in our North American business.
"These decisions will allow our North American business to return to profit in 2014. Regrettably these charges and provisions increase our target combined operating ratio and reduce our expected insurance profit margin and reported profit for 2013.
"It is disappointing that in a year when we made excellent progress in improving our current accident year profitability, strengthened our key capital ratios and our balance sheet, successfully launched our Operational Transformation Program and strengthened our executive team, that we continue to be hampered by the past.
"To go forward with greater certainty around our Group underwriting results, we are emphatically dealing with the North American issues that have been detrimental to confidence and underwriting performance over recent reporting periods.
"As painful as these decisions are, we are confident that our business in North America will trade profitably in 2014.”
The takeaway from this update is that according to reports from analysts and brokers, QBE is on its last chance after this shocker.
The change of chairman won’t be the last move at the top of the company if there are any more downgrades in 2014.
