QBE Group has shocked investors by revealing that its bottom line will plunge into the red this financial year and profits will remain under pressure throughout 2014, as the insurer reels from its aggressive expansion in the United States.
The country's biggest insurer suffered a savage sell-off on Monday, after chief executive John Neal downgraded earnings for the third time in 16 months, laying much of the blame with former management led by Frank O'Halloran.
Shares in the 127-year-old insurer plummeted 22 per cent to $12, the biggest daily slide in 12 years, after it wrote down its US businesses by $US600 million and said it would make a $US250 million loss this year and profits next year would be much weaker than expected.
Chairman Belinda Hutchinson also announced she would resign in March, after three years as chairman and 16 years on the board that oversaw an acquisition spree under Mr O'Halloran. Mr Neal apologised for the string of downgrades since he started as chief executive in August last year and said he believed the worst was now behind the company.
"From an investor point of view, we are extremely understanding of the sentiment that they would have and unequivocal in apologising for disappointing them this year," Mr Neal said. "I'm as certain as I can be that we've taken the corrective action that we need to."
But analysts were sceptical over whether the company had dealt with the legacy of more than 120 global acquisitions that occurred under Mr O'Halloran, who led the company for 14 years.
BBY analyst Brett Le Mesurier said there was probably more negative news to come from QBE as it completed a strategic review of its US business that had led to Monday's downgrades.
"There probably are more reserve top-ups to come," said Mr Le Mesurier.
Noting that QBE had made the downgrade despite benefiting from the weaker dollar and trends in bond markets, he predicted the company would struggle to meet its guidance for 10 per cent insurance profit margin for 2014.
"I think that will probably be a bridge too far," he said.
In a sign of the pressures on QBE, the company said insurance profit margins for this year would be slashed to 6 per cent, the lowest in more than a decade. In August it predicted margins of 11 per cent.
The managing director of White Funds Management, Angus Gluskie, said the size of the downgrade had disappointed investors, but he thought the company was taking cautious steps to protect itself from future slumps of this scale.
"I think there's a certain amount of clearing the decks occurring here," he said. "The quantum of the negative surprise is more than most people thought, so I think there's a level of disappointment."
The write-downs came after a detailed review of US operations, which include a cropping insurance arm and a business that provides cover to protect banks against mortgage defaults.
Two of the mortgage insurance businesses were bought in 2007 and 2008, and Mr Neal said the timing on these deals "couldn't have been worse".
"In North America we did grow too rapidly and I don't think we had the right processes in place to manage and control that business and we certainly didn't have the right leadership," he said.
Despite its woes in the US, the company argues it is responding by overhauling its executive ranks and cutting costs. Some investors are concerned the company may be forced to disclose more bad news from its European operations, though Mr Neal played this down.