Inflation driving insurance premiums higher, says QBE

QBE chief executive Andrew Horton says the pace of inflation will be a crucial influence on insurance premiums, which continue to surge as Australian insurers continue to deal with a deluge of disaster claims.

The global insurer became the latest in the industry to predict further increases in premiums, after it posted first-half profits to $US151 million, a sharp fall from $U$441 million last year. However, the result sparked a 3.6 per cent rally in QBE’s share price to $12.58, as investors welcomed QBE’s upbeat guidance for revenue from premiums and higher returns on its investment portfolio.

QBE said premium rates increased by an average of 9.1 per cent in its Australia Pacific business.Credit: Bloomberg

As markets debate whether inflation may have peaked in the United States, Horton said the speed at which insurance premiums were rising could slow, including in QBE’s Australian business, where premiums jumped 9.1 in the latest half.

However, he said any slowdown in premium increases would depend on whether inflationary pressure eased over time, noting insurers were already having to cope with increased pressure in supplies of building materials and car parts, alongside a jump in disaster claims.

“At the moment, inflation doesn’t look as though it’s going to go away anytime soon, it may moderate a bit. Hopefully, it’s peaked and starts coming down a bit,” Horton said. “I’m expecting the rate of [premium] rate change to start falling a bit,” he said

QBE said revenue from gross written premiums jumped 18 per cent to $US11.6 billion, led by 24 per cent in its US business. During the half, QBE’s profits were affected by a negative return of -$US840 million on its investment portfolio, a remediation program in Australia, and a $U$75 million provision for exposure to the Ukraine conflict.

Amid a global trend towards rising insurance costs, QBE said its premium rates rose 8.1 per cent globally, and 9.1 per cent in Australia, where disaster costs surged because of wild weather including this year’s catastrophic floods.

Chief investment officer at Atlas Funds Management, Hugh Dive, said despite the poor returns from QBE’s investment portfolio, the company’s underlying insurance business was performing better than expected, with solid results in the US, Australia-Pacific and its international division, which includes Europe and parts of Asia.

“Historically QBE have had one of their areas working well, and have been drawn back by the others. This was pretty good across the board,” Dive said.

“All three businesses are having good years when the insurance business is making underwriting profits.”

Dive said the trend of rising premiums should benefit the bottom line, as long as customers retained their cover and premiums increased more quickly than inflation.

QBE’s combined operating ratio - a key gauge of profitability which compares premiums with claims and expenses - improved from 93.3 per cent to 92.9 per cent. A ratio above 100 per cent indicates underwriting is unprofitable.

UBS analyst Scott Russell said QBE’s result was ahead of market expectations, which had been heavily revised down in the lead up to the result. Russell highlighted that yields on QBE’s investment portfolio had lifted in the latest quarter, and said the result was “conservative.”

“Profitability should improve markedly from here,” said Russell, who has a “buy” rating on QBE shares.

QBE will pay a dividend of 9 cents, down from 11c last year.

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