QBE to lift premiums as profit dives 46pc, shares fall 8pc

QBE says it will lift policy premiums after its interim profit fell 46pc due to ‘unacceptable’ rise in claims costs.

QBE chief executive John Neal in Sydney yesterday. Picture: Renee Nowytarger.

The nation’s biggest insurer, QBE, has pledged to increase policy premiums at the expense of ­future income in the wake of a 46 per cent plunge in interim profit, with the poor result claiming the scalp of the company’s Australia and New Zealand chief executive.

Shares in the group fell 8.3 per cent to $10.24 yesterday after the insurer downgraded its outlook for premiums for the full year by $US500 million ($650m) as currency fluctuations and “market conditions” hampered growth.

Tim Plant, who was appointed chief of QBE’s Australian and New Zealand business just 13 months ago, was jettisoned after the division booked a 3.5 per cent slide in gross written premiums.

QBE booked a net profit of $US265m across the entire group for the half year to the end of June, down 46 per cent from the previous corresponding period.

Chief executive John Neal blamed the result on an “adverse discount rate adjustment” worth $US283m after Britain’s referendum to leave the EU sparked a plunge in bond yields across the globe.

Mr Neal said QBE’s combined operating ratio was largely in line with its target, allowing the insurer to bump up its interim dividend by 5 per cent to 21c a share.

But the company, along with the rest of the industry, was facing tough policy pricing competition as easy money flooded markets around the world.

Following a 1.3 per cent decline in premium prices across the business last year, Mr Neal said a similar fall would follow this year. Revenue for the global insurer slipped 1 per cent to $US7.89 billion over the half.

QBE downgraded its gross written premium target for the year to between $US13.7bn and $US14.1bn, down $US500m from its February target range.

It follows a 3.1 per cent deterioration in QBE’s attritional claims ratio, which measures all the company’s small claims as a percentage of net earned premium.

Mr Neal said the “disappointing and unacceptable” increase in claims costs across Australia and New Zealand, driven by pricing competition, rising repair costs and the surge in NSW third party claims, was “correctable and the improvement can be relatively swift”.

Chief financial officer Pat Regan will take over from Mr Plant, who left the business ­immediately.

Mr Neal warned that the company would be ratcheting up premium prices and tightening policy terms for property insurance ­nationwide.

“Margin is much more important to us than growth,” Mr Neal said.

QBE has already ushered in four CTP (compulsory third party) rate increases in NSW, lifting policy prices by 16 per cent.

But Mr Neal said there would be a “couple” of further 1-2 per cent increases.

“If we have to shed market share to get to where we want to be, then we will,” Mr Neal said.

“If we lose 4-5 per cent of our income, I wouldn’t be too surprised by that number.”

Mr Neal said prices also needed to increase across property lines, including home insurance and commercial property, and warned of mid-single-digit price increases and higher excess fees into the “hundreds of dollars” to repair the group’s attritional claims ratio in 2017.

UBS analyst James Coghill said it seemed “fanciful” to restore the deterioration of the claims attrition in such a short time.

Along with the rest of the insurance industry, which is heavily dependent on investment income to support profitability, QBE has been pushed by plunging interest rates to diversify its investments.

Over the past six months, the group increased its exposure to corporate bonds to 54.7 per cent of its portfolio, from 46.4 per cent last year. And while The Australian this week 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, the parent company cut its exposure to high-yield debt and emerging market debt.

More than 90 per cent of the QBE portfolio is A-rated or ­better.

The group achieved a net investment return of 1.65 per cent for the half, or 3.3 per cent on an annualised basis — well above its 2.7 per cent year-end target.

CLSA analyst Jan van der Schalk said the outlook for QBE was “surprisingly strong” given its reported insurance margin for the first half was 5.8 per cent.

Mr Neal said he could see no obvious factor that would improve global insurance policy ­prices in the short term. “If we keep seeing terrorist-related losses, that might be a trigger for price, but I can’t see anything that will increase prices,” he said.