What would be a reporting/annual meeting/end of year update period without some bad news from QBE?
The past few years has seen at least one downgrade or warning from the company, Australia’s biggest insurance group with much of its business offshore in reinsurance and insurance operations in the US and Europe.
But for most of 2015 it seemed QBE was on track – the interim result was solid, weak and dodgy assets in the US, South America were or have been sold to reduce earnings/revenue risk and financial management has become far more disciplined.
But yesterday QBE sprang a surprising on an unsuspecting market and down went the shares 6% in early trading after the company released a briefing given to a finance conference which revealed that QBE was expecting a weak margin performance.
The company said it now expected its insurance profit margins to come in at the bottom end of a predicted 8.5%-10% growth target, whereas the hope among investors had been for something higher.
“Pricing remains competitive in all markets, slightly tougher than 1H15,” the company said at a presentation at the UBS Australian Investment Conference in Sydney yesterday.
But QBE threw a bone to investors to soften the blow by directing attention to its dividend policy for 2015 and 2016, forecasting that payouts would be higher where possible and fully franked.
QBE said it would be boosting its dividend payout ratio for investors in 2016, after the company reported a first half net profit rise of 24% to $US488 million ($688 million).
The group has a policy of paying up to 50% of annual cash profits in dividends to investors, but this will rise to up to 65% in 2016. Investors will be paid 20 cents (Australian) a share dividend for the six months ended June 30, 2016, up from 15 cents a share in 2015.
The shares fell as low as $12.42, but rebounded to end the day down 1.9% at $12.91 – in a market that was up 2.2% in a strong rebound from Monday’s weakness.
QBE 1Y – Lower margins put QBE shares under pressure
QBE also said its gross written premiums were under pressure due to pricing and weakness in some segments and that its attritional claims ratio had come under pressure in its key markets of Australia, New Zealand and North America.
It added the pricing for a partial IPO and trade sale of its lenders mortgage insurance business was currently “prohibitive”, saying it would now focus on growing dividends strongly over the next 12 months.As a result, it is expecting to fully-frank its distributions in 2015 and 2016, while it singled out North America and Latin America as areas where it was concentrating on improving profitability.
QBE shares though have outperformed the broader market, rising 18.4% until the close on Monday since the start of the year compared with the 6.2% drop in the ASX200 index.
Perhaps the biggest challenge for the company and investors (and for 2016) is the worsening shape of its lenders mortgage insurance business. It put the public float of the division on ice earlier this year, and there’s no chance of a trade sale, unless at knockdown prices. Growth in Australia’s residential property market is slowing while delinquencies have been on the rise – pressuring LMI providers (Genworth Australia is another LMI major which is also under pressure) whose fortunes are closely linked to the performance of the housing sector.
Part of the problem is the move by regulators to crack down on high Loan to valuation and low doc loans, and interest only loans – all of which tend to be sold to clients needing Lenders insurance.
