By Jason Fittler
QBE announced on Thursday that exposure to a number of catastrophes during the second half of 2011 and the adverse impact from challenging investments markets will weaken its insurance margin to 7.0%-7.5% for 2011, compared with its expectation disclosed in August 2011 of 11%.
As a result, its profit after tax for 2011 will be 40%-50% lower than the prior year.
The price dropped 22% and traded below $10 before rebounding at the end of the day to finish at $11.35.
The major brokers came out on Friday with price down grades into a range of $11-$14.50, a little late I would think.
Standard & Poor's believes the strength of QBE's diverse business and financial profile allows its rating to withstand some negative cyclicality in its underwriting performance such as what has occurred in 2011.
We note that QBE expects to make an underwriting profit in 2011 in what has been a record year for natural weather events globally and that premiums for many of its product lines are increasing.
While regulatory capital adequacy has softened since June 2011, the company's decision to materially cut its dividend should assist in maintaining a minimum capital ratio requirement above the 1.5x minimum target set by the company.
If you already hold this stock I would continue to hold, a cut to its dividend is disappointing but I still expect to see a good dividend above cash rates.
If you do not hold QBE now is a good time to start to add it to your portfolio. Make sure you have a median term view of 2-3 years.
For more information on QBE Insurance please contact us on 07 4771 4577.