Updates: QBE Moves To Cut Profit Expectations, Sees Div. Steady, Steady Dividend

Eight hours or so after IAG issued its investor day update, QBE, the country's biggest insurer, revealed that while its expecting as 50% to 60% rise in first half earnings, the spate of natural disasters would play havoc with its insurance returns.

QBE said the rise in earnings followed a significant improvement in its investment performance from the first six months of 2010.

The company said net profit will be 50% to 60% higher that the $US440 million earned in the first half of 2010.

At the 60% peak, earnings could be as much as $US704 million ($666 million).

But there's doubt the company could do as well as that as CEO, Frank O' Halloran made it clear earnings will be at the lower end of the range.

But the update, which wasn't planned, seems to have been an attempt to hose down of unrealistic market expectations for the first half.

For example, brokers, BBY's first half estimate for QBE was $US735 million, while UBS's estimate was $US762 million. QBE has now offered guidance of $US660 million to $US704 million.

QBE also revealed that its previous guidance of an insurance profit margin between 15% and 18% had now been reined in to ''the lower end of its targeted 2011 insurance profit margin of 15 per cent''.

Media reports this morning said O'Halloran confirmed in his comments last night that the insurance profit margin was likely to be 13%.

This is a long way from the 22% earned five years ago and continues the weaker trend since then.

QBE said in its statement late yesterday that it had recorded a strong performance in investment income, with net investment income of $US560 million for the five months to May, compared with $US109 million for the whole first half of 2010.

In addition, operational foreign exchange gains were $US120 million for the year so far.

The half year dividend is expected to be maintained at 62 cents per share.

QBE shares rose 10c to $17.28 ahead of the update which was made around half an hour after the market closed at 4 pm.

But QBE warned that the downside for the half year was a lower insurance profit margin than in the previous corresponding period, thanks to the unprecedented level of catastrophe claims in the six months to June 30.

They included the earthquake in NZ in February (and Monday), the floods in Queensland, especially Brisbane and north Queensland and northern Victoria, the terrible earthquake and tsunami in Japan in March and 8 tornados in the US in April and May.

"As a consequence of the unprecedented level of catastrophe claims in the current half, the insurance profit margin will be lower than that recorded in the first half of 2010," the company said.

As a result, CEO, said the company's ability to achieve the forecast full year insurance profit margin of between 15% and 18%, would be largely influenced by the amount of large risk and catastrophe claims incurred in the remainder of the year.

"The lower end of our targeted 2011 insurance profit margin of 15 per cent includes the full allowance for large risk and catastrophe claims, net of reinsurance recoveries, of around $US1.6 billion,"' he said in yesterday's statement.

Large individual risk and catastrophe claims to the end of May, net of reinsurance recoveries, are estimated to be $US830 million, $US340 million higher than the first half of last year and compares with $US1.08 billion for all of 2010.

The company said the investment yield on policyholders' funds, before operational foreign exchange gains, is tracking slightly ahead of our full year target of 3.3% to 3.5%.

The company said it had significant reinsurance protections remaining for the balance of 2011, and had locked in its pricing for 80% of risk protections for 2012 and 2013 at 2011 prices plus an amount equal to the growth in premium income.

In its reinsurance operations, QBE said price increases were being achieved on primary and reinsurance portfolios, and that would be reflected in the second half and 2012 profits.

Looking to the full year, Mr O'Halloran said. ''Substantial premium rate increases on catastrophe-affected portfolios will assist the second half, but large individual risk and catastrophe claims for the next seven months will need to be less than approximately $US770 million for us to deliver a combined operating ratio less than 90 per cent for the seventh year in succession."

But the outlook is weak with the company facing pressure on its insurance margin as it reaches the US hurricane season.

So no big hurricanes in the US and no more disasters elsewhere.