QBE shares hit as natural disasters take $767m bite out of profits

The insurer on Tuesday said it was lifting its allowance for large disaster claims for the year to $US1.75 billion ($2.24 billion) , which will take a $US600 million ($767.42 million) bite out of its pre-tax earnings.

It is now tipped to make a second half loss, dragging full-year profits to a fraction of last year's figure, after the run of disasters exceeded its budget for such events.

Compounding a recent run of disappointments, analysts predicted QBE may also halt its share buyback, and there could be another profit downgrade on the agenda next year when Pat Regan takes over as chief executive.

Although the whole US insurance market has been exposed to recent hurricanes, the downgrade may come as a further blow to investor confidence in QBE - already battered in recent months after a damaging downgrade to its emerging markets business and soft profit guidance in August.

"They've got issues with emerging markets, and now they've got this as well," Bell Potter analyst TS Lim said. "It's going to be tough for them to get out of the dog house."

Shaw Stockbroking analyst David Spotswood slashed his estimates for this year's profit to $US115 million, which is more than 80 per cent below the $US844 million QBE posted last year. He said QBE's update also implied conditions in the insurer's core business had worsened, and he downgraded earnings estimates for 2018 and 2019.

"They are going into losses in the second half," said Mr Spotswood, who has a "sell" rating on the stock.

"The issue will be is it a one-off for the P&L [profit and loss] and the balance sheet for this year."

QBE makes about a third of its revenue in the US, and the downgrade is expected to deal a hefty blow to the profitability of underwriting across the group.

Its combined operating ratio - losses as a share of premium revenue - would blow out to 100 to 102 per cent, indicating no or negative profits from underwriting, it said.

QBE shares fell 3.5 per cent, to $9.82.

Unveiling the downgrade on Tuesday, QBE said it expected 2016 to be "the costliest year in the history of the global insurance industry," due mainly to disastrous hurricanes in North America.

"Cyclone Debbie in Australia earlier this year, Hurricanes Harvey, Irma and Maria which impacted the Gulf of Mexico, the Caribbean and Florida as well as the earthquakes in Mexico have all impacted QBE's businesses," QBE said.

Regal Funds Management portfolio manager Omkar Joshi said that although the hit was a one-off, it was unlikely to be the end of the bad news for QBE, as Mr Regan would probably downgrade expectations after starting as CEO next year.

"There is probably going to need to be a re-base of FY18 expectations at some stage," Mr Joshi said.

He predicted QBE would not complete its entire $1 billion share buyback it announced in February, but may still pay a dividend for the full-year because of the one-off nature of the earnings hit.

"After today's announcement, capital starts to become more of an issue again," Mr Joshi said.

QBE chief executive John Neal, who last month announced he would leave the insurer, said catastrophes in the past month had caused "tragic loss of life and substantial and widespread property and infrastructure damage".

"Our thoughts are with those affected by these devastating events including our customers, business partners and employees," Mr Neal said.

While the hit to profits is substantial, there is also an expectation that insurance premiums could rise after the disasters, after they were depressed in recent years by low claim numbers and ultra low global interest rates.

"While it is too early to speculate how much reinsurance and primary insurance pricing will rise as a result of recent catastrophe experience, QBE is well placed to benefit from price rises with much of our reinsurance programs already purchased for 2018."