QBE suffers investment, catastrophe hit, but embeds inflation expectations in future price rises

QBE’s interim profit drops 66 per cent, but inflation expectations are now ‘embedded’ and will lead to premium price hikes.

QBE has warned premium hikes will continue after the insurer reported a 66 per cent drop in earnings in a year marked by intense flooding in eastern Australia.

QBE told investors that profits fell to $US151m ($213.2m) for the six months to the end of June – from $US441m for the same period one year earlier.

The company’s performance was buffeted by investment turmoil, fed by shifting interest rates, coupled with a rising tide of claims inflation. But QBE’s response to inflation, which saw 5 per premium price rises, helped smooth the insurer’s result.

QBE had initially forecast a 4.5 per cent to 5 per cent inflation rate, but this has surged to almost 6 per cent across the business.

Premium pricing growth, initially forecast in the “high single digits” came in at 8.1 per cent in the first half of 2022. This supported gross written premium growth of 18 per cent, it said.

The company told the market it had “embedded” higher inflation assumptions across the business to reflect ongoing uncertainty, offering guidance of a further 10 per cent increase in gross written premium in the next six month.

QBE chief executive Andrew Horton said “it was hard to imagine” governments getting inflation under control in 12 months.

“It’s gone out of control relatively quickly … Pricing is going to be maintained in the short lines while inflation is relatively high.”

Short tail property claims are proving the worst hit by inflation as supply constraints, price rises, and labour shortages bite.

Mr Horton said it was unclear how long inflationary conditions would run. “I don’t know how long it’s going to take. It would be great to get inflation back under control in 2023, but that’s hard to believe,” Mr Horton added.

However, he noted some areas were seeing price rises coming off.

QBE boss Andrew Horton said the insurer had made ‘pleasing progress’ against its strategic priorities. Picture: Britta Campion

The insurer said it would also target a lift in combined operating ratio, aiming to improve on the circa 94 per cent QBE posted at the end of the 2021 financial year.

QBE also handed out a 3 per cent out of cycle pay increase in July “in recognition of increasing cost of living pressures”.

“Hopefully people will stay with us because we care about our people more,” Mr Horton said, adding that retention was proving difficult, particularly in consumer-facing roles.

The cost of a string of catastrophic weather events weighed on QBE, coupled with a hit from the Russian invasion of Ukraine.

Catastrophe claims topped $454m in the first half, ahead of QBE’s $442m allowance.

However, this figure included $75m QBE booked to cover claims arising from its exposure to Russia’s invasion of Ukraine. The total catastrophe claims were 6.3 per cent of QBE’s net earned premium. Australia proved QBE’s worst market, with 9.8 per cent of net earned premium paid out on catastrophe claims in the half. By comparison, North America cost just 3 per cent of net earned premium.

Citi equities analyst Nigel Pittaway said that, overall, “the result seems at least in line, if not slightly better than our forecasts on an underlying basis and the dividend is better than expected”.

“While there may be some volatility as the market interprets the moving parts, we expect the market to ultimately like the result,” Mr Pittaway told clients.

QBE shares rose 3.3 per cent to $12.54 on Thursday, up 40c.

QBE also booked a $75m hit to profits from its remediation and interest costs from an ongoing pricing review disclosed to the market in July. The group is aiming to turn its investment performance around, targeting a 2.8 per cent exit on its portfolio.

In a note to clients on Thursday, UBS analysts Scott Russell and Shreyas Patel said despite their earlier “reservations about this result” they were pleased with the outcome. But they warned QBE’s forecasts were reliant on a “number of moving parts we think market will likely debate”.

Originally published as QBE suffers investment, catastrophe hit, but embeds inflation expectations in future price rises