Shares in QBE are wallowing in the doldrums after it warned in mid-January of a 40-50% profit and dividend cut.

The global insurer’s share value plunged more than 24% and $4 billion was wiped from its market capitalisation when group CEO Frank O’Halloran revealed it had been hit hard from the disasters that marked the second half of 2011.

Although 2011 has already gone down as a record year for natural catastrophes, analysts had forecast an average net profit rise of 11% for QBE.

Instead, the group warned that profit after tax could be half last year’s $US1.28 billion.

In August QBE forecast an insurance profit margin of between 11% and 14%, based on $US15 billion in net earned premiums, and said measures were in place to protect profits.

But continued heavy losses from catastrophes in the second half of the year and poor investment performance has slashed that figure to between 7% and 7.5% from $US15.3 billion in net earned premiums.

Unrealised losses from a substantial fall in the risk-free rates used to discount outstanding claims provisions have blown out to $US200 million and losses from the investment portfolio are around $US160 million.

QBE told the market its previous minimum estimate of an 11% insurance profit margin was based on an allowance of 13% of net earned premium for large risk and catastrophe claims, average risk-free rates of 2.6% and a gross investment yield on policyholders’ funds of 2.7%.

The significantly lower insurance profit margin prediction reflects a 15% allowance for large risks and catastrophes, and sharper yields of 2.15% and 2.1% respectively on the other factors.

Consequently QBE has slashed its dividend to 25 cents a share from 66 cents a share, which reduces total dividends for the full year to 87 cents a share from 128 cents a share.

“We thought our initial allowance at the beginning of the year for large individual risk and catastrophe claims of 9% of net earned premium was conservative given the past seven years averaged 8.1%,” Mr O’Halloran said. “However, events during 2011 have proven otherwise.”

He says he is “enthusiastic” about next year’s prospects, forecasting a 15% insurance profit margin based on a 10% allowance for large risk and catastrophe claims (compared with 15% last year) and a yield of 3% on its investment portfolio.

But analysts and investors are not convinced. Credit Suisse says in a note to investors that the figure is “overly optimistic”. 

Despite the significantly lower profits, ratings agency Standard & Poor’s has maintained QBE’s A+ stable rating, although it has warned the rating “may come under pressure” if there are signs of “a structural decline in earnings or sustained underperformance against peers”.

The group has been exposed to natural catastrophes around the world, including a full suite of hurricanes, tornadoes, flood, hail and snowstorms in the US; floods and riots in Europe; and flooding in Thailand.

“Our US crop insurance business produced a below-average underwriting profit due to the severe hail and flood claims,” Mr O’Halloran said.

The total cost of reinsurance protection is expected to come under 12.5% of gross earned premium for 2012.

QBE has finalised the placement of its 2012 catastrophe and individual risk excess at an increased 5% cost, he said.

“The 2012 cost includes $US400 million of aggregate covers for a frequency of large individual risk claims and catastrophes, $US200 million of reinsurance protection for the group’s captive, reducing the group’s retention for a US windstorm by $US50 million and additional catastrophe covers for increased exposures in Australia and the US.”

Just before Christmas, Mr O’Halloran announced yet another acquisition – Optima Insurance Group, a small Puerto Rican company with $100 million in estimated gross written premiums.