Results: A Day Of Changes, Bad News For QBE

For Australia's largest insurer, QBE (ASX:QBE) , 2011 is a year to forget with a 45% fall in full-year profit and a sharply lower dividend.

And the company revealed yesterday in a flurry of statements that there would be a change of CEO and surprised investors with the news that it needed to raise up to $US600 million in new capital, quickly.

And, QBE said shareholders will face a lower dividend payout ratio because directors say the company wants to retain more profits to build up its capital position and meet new capital rules from regulators.

A very busy day and the shares will come under enormous downward pressure when they relist today after the fund raising is completed.

The annual results reveal that QBE went close to incurring a loss in the December half year, with net after tax profit plunging to just $US31 million, from $US838 million in the last six months of 2010.

QBE made a profit of $673 million for the six months to June 2011, up from $440 million in the first half of the previous year.

But the cost of the spate of problems hit home in the December half, and earnings collapsed.

QBE made a net after tax profit of $US704 million for 2011, down from the $US1.278 billion for all of 2010.

QBE shares went into a trading halt yesterday for the raising which included the news that long-standing chief executive officer Frank O'Halloran, the man who built QBE into the giant it is today, will retire in August.

QBE said it had found a new CEO in John Neal, currently CEO of QBE's global underwriting operations.

QBE's net profit for 2011 of $US704 million was below the average forecast of seven analysts of $US718 million.

It was reached after the costly impact of a succession of huge claims from floods and storms in Australia and Thailand, the earthquakes in New Zealand tornados and floods in the US, floods and riots in Europe and low interest rates and widening credit spreads which cut returns from the company's reserves and investment funds.

"In 2011, the global insurance and reinsurance industry experienced the worst year on record for catastrophes with insured losses from major catastrophes currently estimated at around $US105 billion," Mr O'Halloran said in yesterday's statement.

QBE had shocked markets last month with the warning that its net profit would fall as much as 50% after record catastrophe claims and said it would cut its dividend.

And, that's what happened with the final dividend being cut to 25c a share from 66c for the 2010 year.

The interim was maintained at 62c a share after interim earnings rose to $673 million from $440 million.

Total 2011 payout was slashed to 87c a share from $1.28 a share the year before.

"This decision was made to preserve capital and allow for future growth," directors said yesterday.

"The major international rating agencies have confirmed QBE's existing ratings.

"The final dividend will be franked at 25% compared with 10% for the 2010 final dividend.

"The total dividend, before reinvestment under the dividend reinvestment plans, is A$956 million, down 28% from A$1,336 million last year.

"The directors consider that the dividend policy going forward should be a payout ratio of up to 70% of reported net profit after tax.

"This ratio will enable the Group to retain capital for growth and maintain its capital adequacy levels to meet the more stringent requirements being imposed by regulators and rating agencies."

There was no mention of this payout limit for dividend in the 2011 annual report released a year ago.

In fact the chairman Belinda Hutchinson said the company had decided to maintain dividend in 2010, despite a fall in profits from 2009.

QBE shares have lost 11% for the year so far, compared with Suncorp's 3% decline and a gain of 9% for IAG (which has hinted it could be doing better in its black hole, the UK).

Suncorp and IAG both revealed better than expected December half figures, and had more upbeat outlooks than analysts had expected.

QBE shares lost 22% of their value in 2011 and they fell to an eight-year low after its January profit warning.

QBE reported an insurance margin of 7.1%, down from 15%.

QBE is looking at a 13% or better margin for 2012, but some analysts said yesterday the company will struggle to achieve that and one around 8% to 10% might be more appropriate.

Revenue increased 37% to $US20.19 billion, driven partially by a 34% lift in gross written premium to $US18.3 billion.

But that surge in revenue didn't help the bottom line as the flood of claims from the bad weather events and the higher cost of reinsurance took hundreds of millions of dollars from the bottom line.

Australia's other major insurers Suncorp (ASX: SUN) and Insurance Australia Group (ASX: IAG) last week reported first-half earnings that topped forecasts but were also hit by an unprecedented level of claims from floods, earthquakes and other natural disasters.

Insurance profit, which includes investment income on policyholders' funds, was US$1,085 million, down 36% from US$1,703 million in 2010.

Net profit after tax was US$704 million compared with US$1,278 million in 2010. The company said the 2011 result benefited from significant premium growth and solid profit from acquisitions completed over the past 18 months.

The gross and net investment yields on policyholders' funds, excluding foreign exchange gains, were 2.3% gross and 2.2% net compared with 2.6% and 2.4% respectively in 2010.

Net investment income on policyholders' funds was up 10% to US$591 million due to acquisitions and slightly higher operational foreign exchange gains, the company said.

Comment: The series of statements yesterday from QBE (the results, the annual report, the fund raising and the change of CEO) raise a number of questions.

For example, the annual report made no mention of the need for the extra $US600 million of new capital.

"QBE's regulatory capital and solvency levels remain sound for the various regulated insurance entities around the world and the consolidated Group," Belinda Hutchison said in her report.

"QBE calculates its minimum capital requirement using the Australian Prudential Regulation Authority's (APRA) risk based capital approach for Australian insurance groups.

"On this basis, the Group's capital adequacy multiple at 31 December 2011, after allowing for the anticipated reinvestment of the final dividend, was 1.5 times or US$2.5 billion in excess of the minimum capital requirement of US$5.0 billion.

"The QBE board considers excess regulatory capital to be necessary in providing flexibility for the future."

So why is the extra $US600 million (which is needed to replace tier 2 capital which QBE says may not meet the new capital rules from the regulator, APRA) needed if the company has $US2.5 billion of excess capital?

The cut in dividend was expected and was prudent given the second half profit slump.

That tells us more about the level of uncertainty in the boardroom than about the prospects for 2012 year.

But the reason, to "preserve capital", was a bit odd. Why? And then there was the new dividend policy to limit payout to 70% of profit.

The reason, to "retain capital ", but why would QBE which said in its annual report, that it has an excess of capital and meets APRA's rules, suddenly need to 'retain capital" as well as raise fresh capital?

Big questions. And then there's the retirement of long time CEO Frank O'Halloran who, with John Cloney, his predecessor (and subsequent chairman) built QBE into the giant it is today.

Mr O'Halloran isn't going until August, when the interim results for the June half year will be announced. It's an awful long handover to his replacement, John Neal.