Shares in QBE Insurance had their best day this year yesterday, rising more than 5% after shareholders heard an upbeat outlook for 2011 profits at the annual meeting in Sydney.
The meeting was told that QBE expects its insurance profit to grow by more than 30% this year as it raised its outlook on net earned premium growth because of new acquisitions and a favourable reinsurance cover.
QBE’s CEO Frank O’Halloran and chairman Belinda Hutchinson told the meeting that the company had already locked in a significant part of the net premium growth and expects its second half to be stronger than the first.
QBE shares jumped 5.5%, or 99c, to close at $19.00 yesterday after touching a high in trading of $19.03, a whisker under the 2010 high of $19.09.
The insurer said net earned premium growth this year will also be boosted by the reinsurance protection cover it negotiated last year which would cut its overall spending on reinsurance by $300 million.
QBE, which had earlier in the year forecast a net earned premium growth of 22% to 25%, maintained its insurance profit margin target of 15% to 18% in 2011.
But while the insurance profit will be strong, the big imponderable for the insurer (and for many of its peers) is the returns from its huge holdings of cash and bonds (around $26 billion at the moment).
In the past couple of years they have been weak, less than 2% last year because of low rates for cash and bonds in the US, UK and Europe.
But yesterday QBE said it saw a possible upturn in this area, saying that its medium and long-term outlook was strong given likely rate increases that will raise interest yields on cash and fixed income portfolio.
Chairman Belinda Hutchinson said, "We have completed the first quarter and I am pleased to report that despite the increase in catastrophe claims to date, our targeted full year insurance profit margin remains in the range of 15% to 18%.
"Our targeted growth in premium income from acquisitions announced to date should see insurance profit, before tax; grow by at least 30% in 2011."
She told the meeting, "Based on our outlook we anticipate at least maintaining our dividend in 2011."
"We also remain confident about our medium and long-term outlook, particularly from the expected rise in interest rates," she added.
And CEO Frank O’Halloran said that the targeted 2011 insurance profit margin of 15%-18% of net earned premium "assumes that gross investment yields will be around 3.3% to 3.5% on policyholders’ funds and that $1.40 of investments are held for each dollar of net earned premium".
"Our target of 3.3% to 3.5% yield compares with an average 2010 yield of 1.9% on our total investment portfolio if invested in AAA cash.
"We are currently on target to achieve the higher yield which is an important driver of the insurance profit margin," he told the meeting.
"As the significant growth in net earned premium has already been locked in for this year, we expect insurance profit to increase by more than 30% when compared with 2010," he said.
"Longer-term shareholders should be aware of the strong positive effect of the inevitable interest rate rises on our profitability and probability of adequacy of insurance liabilities," Mr O’Halloran said.
"A 1 per cent overall increase in interest rate would add 2.8 per cent to insurance profit margin and $280 million to profit after tax," he said.
Both Ms Hutchinson and Mr O’Halloran told the meeting that QBE had more than $2.2 billion in excess capital and can raise up to $1.2 billion in additional debt (without impacting its rating) to finance more acquisitions.
