Profit after tax for the 12 months ended Dec. 31 dropped 40 percent to 50 percent from 2010, Sydney-based QBE said in a statement today. Its insurance profit margin, a key measure of performance, was 7 percent to 7.5 percent, down from the 11 percent to 14 percent forecast in August.
QBE is facing an unfortunate trifecta of a larger number of so-called catastrophe claims, increasing paper losses on its fixed interest investments and a similar impact from a change in a key number known as the ‘risk free rate’ which insurance companies use to calculate the amount of money they must set aside for claim payments.
The net result was a profit downgrade of between 40% and 50% below the prior year – a very significant haircut in anyone’s language.
Adding to the challenges, insurance is a fairly commoditised product. As a consumer, you pay a premium which is more or less correlated to the value of the home, car or life you are insuring. That shouldn’t come as a surprise – each insurer has a team of people whose sole jobs are to calculate the likelihood of a particular event (car accidents, earthquakes and even death) during a given period, and come up with a premium that covers the risk to the insurance company and leaves a little profit afterwards.
In the last 5 years, QBE shares have traded as high as $35 and as low as $10 (yesterday). 10 years ago, the shares were selling for around $6. The implication is that the company somehow increased in value by 5.8 times between 2002 and 2007, and then dropped almost 70% to today’s price in the period since.
The benefit of such a miscalculation is that it gives patient, insightful investors the opportunity to buy low and sell high.
QBE has a top-notch management team, a great collection of businesses, and a very conservative investment strategy. It is in a tough, volatile business. Today’s share price likely reflects to a large degree the reduced 2011 profit result that QBE will turn in. Effectively, Mr. Market is giving us the chance to buy QBE at a price that implies no improvement.
To be honest, I think QBE would still be reasonable, if not outstanding, value even if the profit stayed around these levels, so the downside is probably somewhat – but not entirely – protected.
My strong belief, however, is that the 2011 profit is likely to be a low point in the company’s performance. I don’t know whether 2012 is the beginning of the profit recovery, but I believe it will improve over time.
how your prediction for the QBE Insurance group stock 2012 ?
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