Regulator's Eye On Battered Qbe

Sydney Morning Herald

Wednesday September 19, 2001

Anthony Hughes

The insurance industry watchdog said yesterday it was staying in regular contact with QBE Insurance after the insurer disclosed on Monday that it held inadequate reinsurance cover for large claims costs from the US terrorist attacks.

It is understood the Australian Prudential Regulation Authority has also expressed its concern that QBE had stated last Tuesday it was ``substantially protected" from the attacks only to tell the market on Monday this week that insurance liabilities across a range of classes could wipe out a substantial part of this year's expected $250 million-plus profit.

Analysts have raised concern about the open-ended nature of QBE's loss estimate and capital position, helping to push its shares down 68c yesterday to $5.11.

QBE's market value has halved to $2.3 billion since the attack as investors worry about where the losses will end.

An APRA spokeswoman said yesterday the regulator was in ``close contact" with QBE.

So far it was satisfied QBE could meet current solvency rules and tighter regulations likely to come into force next year.

QBE's losses come via its rapidly expanded Lloyd's of London operations in Europe and the US, which conduct both primary underwriting and reinsurance (insurance for insurers).

QBE managing director Mr Frank O'Halloran said on Monday that the company's solvency would still be 1.32 times the APRA guidelines and the final dividend for the year to December would be maintained.

But he warned the attacks would result in the worst insured losses ever for the industry up to $US50 billion ($100 billion) forcing insurers to stop covering terrorism and increase premiums across the globe.

The market's love of QBE, until this week the only major listed general insurer to have avoided the controversies plaguing the sector in recent years, has been sorely tested, as analysts lowered their valuations of the company.

ABN Amro lowered its recommendation on the stock from ``add" to ``hold", citing changes to growth and risk assumptions, and cut its valuation from $11.80 to $10.07.

JP Morgan said the market's reaction was overdone, but the disclosure had shaken confidence in QBE's protections, particularly since it had initially indicated reinsurance cover would protect it from major losses.

Merrill Lynch, which has a long-term ``buy" but a neutral call on the shares, said QBE had factored in a worst-case scenario and the $2 billion fall in market value was not justified.

For example, the broker noted that QBE through its Lloyd's operations had a 9 per cent exposure to aircraft hull damage, insured for $US150 million, but the involvement of other Lloyd's parties would reduce this.

Merrill also noted that global insurers' shares had outperformed in five of the last six bear markets and previous large catastrophes had resulted in rate rises that had benefited insurers after the crises.

NRMA Insurance remained steady. Its exposure is minimal but weak equity markets could hurt investment income.

AMP recovered 60c to $17.16.

© 2001 Sydney Morning Herald

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