QBE profit plunges 46pc, downgrades outlook

Insurer QBE’s shares sank 11pc after a sharp drop in profit amid intense competition, and a downgrade to its outlook.

QBE has also downgraded its outlook for gross written premiums.

Australia’s biggest insurer QBE has revealed a sharp drop in interim profit amid a reassessment of its investment assets and intense price competition in the local insurance market.

The insurer (QBE) also downgraded its outlook for gross written premiums by around $US500 million as currency fluctuations and “market conditions” hamper growth.

QBE fell 11.4 per cent to a six-week low of $9.89 in early trading after the disappointing results.

QBE today unveiled a net profit of $US265 million for the half year through June, down 46 per cent on the same time last year.

QBE managing director John Neal said the slide in profit was mainly due to an “adverse discount rate adjustment”, or a tweak to the present value of future claims liabilities. Discounting this, Mr Neal said QBE’s combined operating ratio was largely in line with its target.

Along with the rest of the insurance industry, which is heavily dependent on investment income to support profitability, QBE has been pressured by plunging bond rates to invest in riskier assets. This week The Australian revealed that for the first time QBE’s Bermuda-based reinsurer Equator Re ploughed money into hedge funds while also increasing its junk bond holdings.

Revenue for the global insurer slipped 1 per cent to $US7.89 billion, and Mr Neal said insurance premiums in Australia and New Zealand continued to be under the pump amid intense competition, but warned of premium price increases.

QBE’s underwriting profit was down 5 per cent to $US337m in the half year.

“QBE’s business is not immune to macro conditions that are challenging the returns of all insurance companies,” Mr Neal said. “This is particularly evident in our Australian and New Zealand operations where cumulative pricing declines concurrent with heightened claims inflation have detracted from performance in several of our short tail classes, exacerbated by the well-publicised deterioration in the NSW compulsory third party scheme.”

QBE’s John Neal.

QBE downgraded its gross written premium target for the year to between $13.7bn and $14.1bn, down from its February guidance of between $14.2bn and $14.6bn, citing the group’s “current view on foreign exchange rates, market conditions and, in the case of net earned premium only, the $176 million charge to reinsure UK long tail liabilities incurred during the first half”.

Competition in the insurance industry is heating up as easy monetary policy floods the market with cheap cash. Disrupter challenger brands, such as Youi and Budget Direct, forecast to reach 13 per cent of the general insurance market over the next three years, while banks are expected to increased their reach to 10 per cent of the market.

“We are responding decisively with price increases, revised terms and conditions and other portfolio adjustments, and remain confident that these actions will benefit the claims ratio in 2017,” Mr Neal said. On average, insurance pricing across QBE decreased by 1.3 per cent in 2015.

Mr Neal also said the group was on track to meet its goal of reducing expenses by $150 million over the year.

QBE will pay a 21c partly-franked dividend, representing a 5 per cent increase in the group’s distribution.