QBE beats profit expectations on the back of raising the cost of premiums

Listed insurer QBE has banked a 5 per cent lift in profits, sending shares surging.

QBE Group chief executive Andrew Horton. Picture: Britta Campion

Insurance giant QBE beat profit forecasts with a rising tide of insurance premiums outpacing inflation.

But the insurer said it had taken a conservative approach to its latest catastrophe budget.

QBE delivered an above-consensus profit for investors, after locking in hefty premium price rises early in the year; adjusted cash profit was up 5 per cent to $US847m ($1.24bn).

That result came despite a series of hits from natural disasters, the Russian invasion of Ukraine, and the increasing cost of replacing what it insures.

Chief executive Andrew Horton said QBE was planning for more inflation.

“Sadly I’m old enough to remember inflation being around for quite a period of time,” he said. “I’m not sure anything is baked in, it’s never that consistent.”

QBE said its net claims ratio had sunk to 58.1 per cent in the full year, down on its payout of 62.4 per cent the year prior.

This was despite a $US75m charge booked by QBE to cover potential costs arising from a pricing review for its Australian customers and a 15 per cent blowout in catastrophe costs to $US1.06bn – well above QBE’s earlier $US962m budget.

Mr Horton said QBE had tried to take a conservative approach to its latest catastrophe budget but it was difficult to budget across the world.

“You don’t want too much of anything in any country,” he said.

Revenues were up 15 per cent across the group hitting $US23.8bn.

The insurer took a $US65m haircut after signing the reinsurance cover for its North American operations.

This resulted in QBE taking a $US390m net earned premium hit, but it also avoided $US327m in claims.

Gross written premium, the measure used by insurers to tally their insurance business, lifted by 13 per cent in the year to $20bn as QBE signed on new customers and pushed through price rises.

But the company slowed down its premium rises to just 7.9 per cent on the back of hefty increases passed on by the insurer.

The insurer’s shares surged on the news, trading up 7.39 per cent at $14.39 by market close on Friday.

QBE’s international business had a 14 per cent increase in gross written premium, while Australia’s was just a 9 per cent lift.

The insurer said it had moderated rate increases where “rate adequacy has improved most”, notably its casualty policies which cover things including theft, aviation, or workers’ compensation.

But QBE said price rises would continue as inflation was likely to persist, offering guidance of mid to high single-digit growth in gross written premiums in the year ahead.

The insurer said it had benefited from the release of $160m in Covid-19 provisions, but previous year claims and catastrophe claims weighed on profits.

Mr Horton, who joined QBE in September 2021, has been pushing to unwind parts of the complex business built up under his predecessor, Frank O‘Halloran.

Allan Gray portfolio manager Simon Mawhinney said QBE’s latest results were “more good than bad … which is unique for QBE, which was a great relief”.

“This is the second year in a row they’ve made double digit returns on equity,” he said.

“It’s amazing considering where they’ve come from.”

QBE said on Friday it had signed a deal to hand over a bundle of long-tail claims signed between 2010 and 2018 to NASDAQ-listed Enstar, in a move expected to cost $100m.

The deal will result in Enstar taking over QBE’s $1.9bn in reserves for these claims and facing the first $900m of payouts.

Mr Horton said these long-tail claims had already given QBE surprises and the deal was aimed at making sure the insurer didn’t have to worry about them any further.

“The financial lines business, in the mid 2010s, really suffered because we saw social inflation come through,” he said.

QBE said it had managed a 93.7 per cent combined operating ratio, but aimed to lift this to circa 93.5 per cent in the year ahead and maintain it at “consistent low-to-mid 90s” throughout the earnings cycle.

QBE said the significant lift in interest rates supported a lift of exit running yields to 4.1 per cent – well above the 0.7 per cent managed at the end of 2021.

The insurer aims to hold its exit running yield at least at 4.1 per cent in the year ahead.

QBE said it would hand investors a 30c final dividend, 10 per cent franked.

This takes total returns to investors to $US578m for the year.

Originally published as QBE beats profit expectations on the back of raising the cost of premiums