QBE Insurance swings back to annual profit

QBE shares rose 5pc in early trade after it swung to a $1bn full-year cash profit and lifted its payout sharply.

QBE Insurance CEO Patrick Regan. Pic: Hollie Adams

QBE Insurance has swung to a full-year cash profit of $US715 million ($A1 billion) and raised its final dividend by more than six times, in a result underpinned by premium rate increases and fewer natural disasters.

In a statement to the ASX, QBE said net cash profit was $US715 million for the 12 months ended December 31, compared to a loss of $US262 million in 2017.

The result was buoyed by average group-wide premium rate increases – the cost of insurance policies to the end buyer – of 5 per cent.

QBE’s shares climbed 5.1 per cent in early trade to $12.06, as investors focused on the insurer’s upbeat 2019 guidance.

Volatile financial markets in the latter half of 2018 weighed on QBE’s net investment yield which slid to 2.2 per cent from 3.1 per cent in 2017.

Today’s headline profit number was slightly below expectations for an annual profit of $US718.2 million.

“I’m pleased with the progress made against our objectives in 2018,” QBE’s chief executive Pat Regan said.

“The actions we have taken to simplify the group, implement a rigorous performance management framework and upgrade core capabilities in pricing, risk selection and claims management delivered meaningful improvement in the underlying quality of our business and our financial performance.”

QBE declared a final dividend of 28 cents per share, compared to 4 cents per share a year earlier. That took total dividends for 2018 to 50 cents per share and combined with $333 million in shares bought back from investors amounts to shareholder returns of more than $1 billion.

QBE outlined its 2019 targets, saying it expected the combined operating ratio - a measure of profitability expressed as a ratio of total costs divided by total revenue - to come in at 94.5 per cent to 96.5 per cent.

The combined ratio for 2018 came in at 95.7 per cent for 2018, at the bottom end of a targeted range of 95 per cent to 97 per cent.

The higher the figure, the greater the payouts versus premium income.

The insurer also ratcheted up guidance for its annual net investment return to print at 3 per cent to 3.5 per cent.

Statutory net profit printed at $US390 million for 2018, weighed on by factors including discontinued operations and foreign currency impacts. That compared to a $US1.2 billion loss a year earlier.

Revenue fell 8 per cent to $US15.4 billion.

Gross written premium - the total premium written by an insurer before deductions - was higher at $US13.7 billion for 2018 compared to $US13.3 billion a year earlier.

Citigroup analyst Nigel Pittaway said while the earnings result missed his estimate, investors would focus on QBE’s guidance and the fact it met the 2018 targeted range for the combined operating ratio.

“The market should largely look through the miss on core earnings due to the nature of the items involved, given underlying combined operating ratio is in line,” he said. “Instead, we expect the market to focus on QBE meeting its FY combined operating ratio guidance without a downgrade for the first time in many years, and guidance for an improved FY19.”

QBE has perennially disappointed the market with earnings downgrades and Mr Regan took over in January 2017 after the abrupt exit of John Neal. He has embarked on an overhaul and simplification of QBE including the divestment of a number of business units including most of its Latin American arm and the sale of renewal rights of its independent agents’ personal portfolio to Liberty Mutual.

The insurance industry, including QBE, had its results battered by record levels of catastrophes globally in 2017.