QBE, IAG earnings guidance at risk from Mother Nature

PROFIT guidance for QBE Insurance and Insurance Australia Group is under threat due to the worst spate of natural disasters in more than 35 years.

After Monday's earthquakes in New Zealand, both companies updated the market, with QBE chief executive Frank O'Halloran revealing $US830 million in large individual risk and catastrophe claims, net of reinsurance, for the five months to the end of May.

This was already $US340m higher than the first half of last year, and threatened the lower end of the group's targeted 15-18 per cent insurance margin for 2011, which assumed full use of the $US1.6 billion ($1.5bn) allowance for catastrophe claims.

"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.

He added that he had never seen anything like the current frequency of disasters in his 35 years in the insurance industry.

In the absence of a significant turnaround, the QBE chief agreed the first-half insurance margin was likely to come in at about 13 per cent.

This was after a decline of about four percentage points due to weather events such as Cyclone Yasi, the Victorian and Queensland storms, the Japanese earthquake and eight major tornados in the US.

Mr O'Halloran said he could not "make any guarantees" about whether the remaining $US770m in catastrophe allowances would be sufficient.

"I can't guarantee that we won't have a large hurricane season" in the US, he said. "If we have two large hurricanes the numbers are under pressure."

Profit for the June half-year was expected to be 50-60 per cent higher than $US440m in the previous corresponding period.

Meanwhile, IAG chief executive Mike Wilkins told investors at a strategy briefing yesterday that the insurer had been on track to meet updated insurance margin guidance of 8-10 per cent before Monday's New Zealand quakes.

IAG would advise the market as soon as it had a "firm assessment" of the likely outcome, he said. "Obviously, our reported performance will be impacted by the substantial natural peril claims costs that have already been incurred in the first quarter of calendar 2011 and by any impact of the latest earthquakes in Christchurch," Mr Wilkins said.

Net natural peril claims, he said, would come in "a little higher than" the $540m estimate.

Mr Wilkins also announced plans to "reset" IAG's priorities, with less emphasis on the struggling British operations and more focus on growth in Australia, Asia and New Zealand.

On Asia, he said, the company aimed to extract 10 per cent of its gross written premium from the region by 2016.

The regional operations contribute $430m of $8bn in gross written premium.

Existing businesses in Malaysia, Thailand and India would expand, and IAG would move into China, Vietnam and Indonesia.

As reinsurance costs rise after this year's string of natural disasters, it is expected the insurer will have to increase premiums to maintain targets.

IAG Direct Insurance chief executive Andy Cornish said premium increases were likely to be felt most in the home and motor insurance sectors. Premiums in the New Zealand home insurance market had already increased by 15-20 per cent. On the upside, QBE enjoyed strong investment income in the five months to the end of May, including foreign exchange gains.

Net investment income for the period was $US560m compared with $US109m for the first half of last year.

Mr O'Halloran said substantial price increases were being achieved on catastrophe-affected primary and reinsurance portfolios written by QBE.

These increases would be reflected in the second half, as well as next year's profit result.

However, catastrophe claims for the next seven months would need to be less than $US770m for QBE to deliver a combined operating ratio of less than 90 per cent for the seventh year running.