(Reuters) — Australia's biggest insurer QBE Insurance Group on Tuesday announced measures to raise up to $1.5 billion after first-half profit dropped 18% due to higher payouts to U.S. clients, while rival IAG posted strong earnings growth.
Hefty claims resulting from adverse weather in North America took their toll on QBE's bottom line, as Australia-focused Insurance Australia Group Ltd. posted a 59% surge in full-year net profit thanks to higher investment income.
Shares in IAG on Tuesday climbed to their highest level since February 2007. QBE shares were on a trading halt, and have fallen 37% since the first of three profit downgrades in the past year.
The results show the high price QBE is paying for its foreign expansion in terms of earnings stability, even if some analysts expect it to pull ahead of domestic competitors like IAG in the long-term.
“IAG operates in just the Australian and New Zealand markets. QBE operates in global fragmented markets and made a decade of acquisitions, some of which were badly timed, and it's still trying to work its way out of that,” said David Spotswood, senior analyst at Shaw Stockbroking.
QBE has completed more than 75 acquisitions in the past 10 years to expand to 50 countries.
It is Australia's largest insurer by premium income and generates almost three quarters of its premiums abroad. About 30% of its premium income came from North America, which was lashed by severe storms in early June producing baseball-sized hail and tornadoes.
In a bid to offload non-core assets, the company said it would finalize the sale of its central and eastern European operations and planned to sell part of its Australian and North American underwriting agencies in the second half.
That includes sale of Underwriting Agencies of Australia, which it bought in 2008, and two body corporate brokerages acquired in 2004. QBE would retain the underwriting rights at these businesses.
The sales are part of a raft of capital-raising measures including a $750 million share placement and a share offering of its lenders mortgage insurer business, which had $1.2 billion in assets at the end of June.
“These initiatives deliver significant additional cash and capital resources that will substantially improve the group's financial flexibility and ability to better withstand a reasonable range of downside scenarios,” QBE said in a statement.
QBE's insurance profit margin slipped to 7.6% in the first half from 10.8% a year ago. It expects margins to rise to 8% to 9% by the end of the financial year — still well below IAG's 18.3% in 2013-14.
“It's the most credible position they've been in a couple of years,” Morningstar analyst David Ellis said of QBE.
“The market will not give them any more chances. If this does not work out I can't see them recovering their credibility and the blue chip rating for a conceivable number of years.”
IAG, which specializes in motor and property insurance, gave an upbeat outlook for gross written premium in the year to June 2015 — up 17% to 20% — helped by the acquisition of Wesfarmers Ltd.'s insurance underwriting business.
IAG said its insurance margin was at the higher end of its guidance as it announced full-year net profit of AU$1.23 billion ($1.1 billion), in line with forecasts.
Insurance margin is a measure of profit the company makes on premium.
It announced a dividend of 26 cents per share, bringing the full-year dividend to 39 cents, an increase of 8.3% from a year ago.
With dividend yield of over 6%, IAG is among the highest dividend paying insurers in the world, according to Thomson Reuters Starmine. That compares with a global average of 2.9%.
IAG shares were up more than 7% from the start of the year to Monday's close, outperforming the 4.3% gain in the benchmark.
QBE shares were placed on trading halt due to the share placement.