QBE Insurance shares jumped sharply on Friday after the company said it will buy the insurance portfolio of US insurer Balboa from Bank of America.
The shares rose more than 7% to $18.20 on Friday after the announcement and results update which confirmed a slide in earnings for 2010. Trading in the shares had been halted Thursday ahead of the announcement.
The news and higher share price reversed the recent lingering weakness in the shares as investors fret over a forecast profit slide.
The shares had their best day in a year after the insurance group said it would buy the insurance portfolio of US insurer, Balboa from Bank of America, and said full-year profit would be in line with market estimates. The shares ended up $1.26.
The deal includes an upfront payment to Bank of America of $US700 million for the distribution rights and portfolio transfer. QBE will assume about $US1.2 billion of insurance liabilities of Balboa.
That takes the total amount QBE has spent in the US to around $US4.5 billion since 1996.
That slide was confirmed in the update as being on track at around $US700 million for the year to December.
However, the company said its insurance profit margin for 2010 will be lower than previously forecast, and will be at a similar level in 2011.
Releasing preliminary figures for the year to December 31, 2010, QBE said its net profit after tax and exceptional items will fall by 17% on the previous corresponding period to about $US1.28 billion ($A1.26 billion).
(Before and after exceptional items, QBE earned $US1.97 billion in 2009.)
Its insurance profit margin is expected to be 15%, below its earlier guidance of between 16% and 18%.
‘‘This is attributable to the higher than expected frequency of small and large catastrophe claims through the second half and the continuing low interest yields in the US, UK and Europe,’’ QBE said in the statement.
For calendar 2011, QBE forecast an insurance profit margin of between 15% and 18%.
"We will continue with our current strategy of growth by acquisition and focus on market leading underwriting performance,’’ chief executive Frank O’Halloran said in the statement.
"Our short duration conservative investment strategy means that any rise in interest rates in the US, UK and Europe will be beneficial for our profitability and our capital adequacy.’’
But this also means that while official interest rates in the US, Japan, Europe and the UK remain at all time lows, the company will struggle to earn profits on its "float" and reserves (which have to be invested in high grade, AAA rated paper like UK or US treasuries).
QBE said 2010 saw a frequency of small and large weather-related and earthquake catastrophe claims not seen since 1999. (A point also made on Friday night by a bigger competitor, Munich Re – see below.)
This was due to storms in Perth and Melbourne, earthquakes in Chile and Christchurch and storms and flooding in Queensland in late December. QBE said the late-December storms in Queensland will cost it an estimated $US45 million.
The flooding in Queensland, northern NSW and Victoria in January has resulted in 4500 claims to date, at a cost of about $US100 million.
QBE’s preliminary estimated costs of cyclone Yasi are around $US100 million.
Shareholders won’t get hit from the lower profit.
QBE said on Friday that subject to the Board’s consideration of the financial statements, the final dividend for 2010 is expected to be maintained at 66c per share and will be franked at 10%. The dividend reinvestment programs continue at a 2.5% discount.
And it just wasn’t QBE that had big losses to report from the floods.
Munich Re is the world’s second biggest re-insurer (and much, larger than QBE).
In its fourth quarter profit announcement issued on Friday night in Germany, Munich said about the impact of the floods and other problems (such as the earthquakes in New Zealand and Chile):
"Natural catastrophe losses amounted to around Euros1.56bn (0.2bn in 2009) for the entire year.
"The largest loss event for Munich Re in 2010 was the devastating earthquake in Chile."
For the earthquake in New Zealand, Munich Re is now reckoning with a claims burden of €0.34billion (over $A450 million).
"The largest individual loss in the fourth quarter was the flooding in northeastern Australia, with claims costs of around €0.27bn. After extreme precipitation at the end of the year, large areas of the state of Queensland were inundated, with the floods continuing into the first weeks of January.
"The metropolis of Brisbane was hit by its worst floods for more than three decades.
"This means that, on the basis of current estimates, the claims burden accounted for in the fourth quarter of 2010 will be followed by claims expenses of a similar amount in the first quarter of 2011.
"The insured market loss for all events together is estimated at A$ 4–5bn."
Despite these losses, Munich Re managed to report a profit of €2.43bn for 2010, down from the previous year’s €2.56bn.
The big losses in the fourth quarter though took t
