Investors unload QBE as disasters erode margins

SHARES in QBE crashed to a six-month low yesterday after the insurance giant warned of cuts to its profit margins as the worst run of natural disasters in 40 years shook the industry.

Suncorp and IAG also suffered share-price falls as investors reacted to concern that continued catastrophic events and rising reinsurance costs would mean insurance profit margins took a hammering this calendar year.

Yesterday, the prospects for further profit downgrades were translated to the market, where QBE shares suffered a 3.7 per cent, or 63c, drop to a six-month low of $16.65.

That gloom spread to shares of IAG and Suncorp as market concerns about the expensive task of renegotiating reinsurance renewals next month became more apparent. IAG shed 7c to $3.51 while Suncorp shares fell 5c to $8.25.

The slump in QBE shares followed a statement from chief executive Frank O'Halloran, who shocked investors on Tuesday when he flagged a profit guidance downgrade two weeks before closing the books for the six months to June 30.

That downgrade meant QBE update the market with a conservative 50 to 60 per cent rise -- up to about $US700m ($657m) -- on the $US440m profit for the previous corresponding period. That update, however, was well below analysts' forecasts who had predicted earnings of up to $US900m.

There is growing concern that insurers will have to dip into forecast profits should more natural disasters strike, or reinsurance prices spike, due to the unprecedented string of catastrophes.

"Achievement of our targeted 2011 insurance profit margin will be largely influenced by the level of large risk and catastrophe claims incurred in the remainder of the year," Mr O'Halloran said.

QBE has only $US770m remaining from its $US1.6 billion full-year allowance for disaster claims. IAG too has been buffeted by the high number of natural peril claims, which have blown out to above $540m for the 2011 year ending on June 30.

The fear within the investor community is that those remaining funds are at serious risk of being breached, especially as QBE, IAG and Suncorp are likely to face more large claims by the end of the year, following this week's quakes in Christchurch and with the remainder of the US hurricane season, which typically runs through to November.

"The remaining catastrophe reserves for the year of $US770m will be enough for QBE if the US has a hurricane season like last year," Commonwealth Bank analyst Ross Curran said.

"But the issue is the Climate Prediction Centre is predicting there to be three to six major hurricanes in the Atlantic this year and if these hurricanes hit land, then there are risks of further downgrades."

Mr Curran also warned of the risk the latest New Zealand quake losses could have on these insurers: "If those losses are large then there could be more downgrades but it's too early to tell just yet."