As it forecast earlier this month, QBE Insurance, Australia’s biggest insurance group, saw a 16% fall in 2010 full year net profit because of lower investment yields and higher claims.
And the company remains cautious about the coming year, even though it sees a small rise in premium income.
But weak returns from its reserves and investments will again restrict earnings growth, as will the higher cost of reinsurance.
QBE is a major corporate victim of the current low official interest rates in the US, Europe and the UK, where it holds billions of its reserves in government bonds and notes.
The Fed, European Central Bank and the Bank of England have all been maintaining official rates of 1% or less (as has The Bank of Japan).
The Reserve Bank of Australia has of course been lifting rates (to 4.75% last November), but Australia is now a small part of QBE’s global business.
And it’s the US where the company has spent close to $US4 billion in the past decade or more growing its primary and reinsurance businesses.
The company said the substantial reduction in net investment income last year was due to under-performance of its equity portfolios and lower interest yields on its cash and fixed interest portfolios.
Directors summed it up in yesterday’s report:
"QBE’s diversified global portfolios, strict underwriting discipline and focus on profitability enabled the Group to again produce a solid underwriting result.
"QBE’s combined operating ratio was 89.7%, outperforming the great majority of QBE’s competitors.
"Notwithstanding the strong underwriting performance, the difficult investment markets, particularly the lower interest rates and volatility in credit spreads, affected investment income on our policyholders’ funds and was the main reason for a lower insurance margin compared with last year.
"QBE holds US$17.1 billion in cash and fixed interest securities -to support its obligations to policyholders.”Due to our significant operations in the US, the UK and Europe and our consequential large exposure to the US dollar, sterling and euro securities, the gross yield on assets backing our policyholders’ funds reduced from 4.5% last year to 3.4% this year.
"Local regulatory requirements oblige us to maintain a large proportion of our investments in local currencies.
"To mitigate foreign exchange risk we hold assets in currencies matching our liabilities.
"The gross investment yield on assets backing our shareholders’ funds was 1.9% compared with 4.4% last year, with the reduced yield mainly due to our lower equity returns."
The overall gross investment yield last year was 2.9% in 2010, down from 4.5% in 2009. For the coming year it is looking for a gross investment yield of between 3.3% and 3.5%.
So in other words, they will still be well under the returns in 2009.
The stronger Australian dollar is not making it any easier for QBE as well.
The group reported a net profit of $1.28 billion compared with $1.53 billion announced a year ago.
QBE shares shed 24c, or 1.3%, to $18.16.
Since pre-announcing the result and 2011 reinsurance arrangements (more reinsurance than in 2010), QBE shares have jumped from the 52 week low of $16.87 on the day of the statement, February 2, to a high a couple of weeks later of $19.09, before slipping back in the past week.
QBE said it believed it had adequate capital cushion to meet new regulations and expected an overall premium rate rise of 2% this year and an insurance profit margin of 15% to 18%.
The full-year insurance profit margin for 2010 was 15%, outside QBE’s target range of 16% to 18%.
QBE said that was due to lower investment yields on lower insurance funds, increased premium taxes and the high frequency of weather related and earthquake catastrophe claims.
It declared a final dividend of 66c per security, unchanged on a year ago.
That made for an unchanged total payout to shareholders of $1.28 a share, another sign that the company remains very cautious about the outlook.
Net earned premium in 2010 was $US11.4 billion, down 20% from 2009.
QBE has forecast net earned premium growth of between 22 % and 25%, based on profitability from acquisitions and new reinsurance arrangements.
Gross earned premium is forecast to grow by 19% to 22%.
"We have upgraded our premium growth targets following a further review of recent acquisitions and new distribution channels," CEO Frank O’Halloran said in yesterday’s statement to the ASX.
"The acquisitions and other initiatives in place to increase profitability are likely to see our insurance profit increase by a minimum 22 per cent in 2011."
He said those targets are subject to the usual caveats relating to claims, interest rates, equity markets and foreign exchange as well as receipt of regulatory approvals for recent acquisitions.
When central banks like the US Fed, the Bank of England and the ECB start raising interest rates, investment yields on policyholders’ funds and liabilities for insurers like QBE will start improving.
QBE also yesterday revealed that the New Zealand earthquake could cost it as much as $175 million after taking into account the impact of reinsurance costs.
Combined with payouts of $100 million for each of the Queensland floods and Cycl
