By all measures it was a surprisingly interim weak result from global insurance group, QBE yesterday.
In fact so weak was the result that the company broke its limits on dividend payouts to ensure it could lift the interim to Australian shareholders.
That is a sign of a company management wanting to keep faith with its shareholders, knowing they have just reported a very weak result with no redeeming feature.
In shocking the market with a sharp slide in profit, problems in its vital Australian market and a small downgrade to full year results, QBE has continued its now very chequered career of giving investors a shock every year or two.
In fact consistency is now a virtue at QBE, even though the board and management would dearly like it – several times in the past five years it has shocked investors with big profit slides, downgrades, weak results, a big change in dividend policy asset losses and weak insurance performance.
But in the past year to 18 months the company appeared to have settle down, but then yesterday it revealed a 46% drop in half-year profit to $US265 million after falling interest rates and the fallout from Brexit meant it had to discount the value of its assets by $283 million.
However the company has sought to reassure investors it remains in good shape for future growth and announced a 5% (or just 1 cent) increase in the interim dividend to 21 cents (AUD) a share fully franked.
The company also revealed plans to install a new local CEO in Australia and NZ and raise its domestic prices in an attempt to repair a poor performance, especially in the NSW third party market. That means higher premiums for most types of cover including car, home and contents insurance.
The $US265 million for the six months ended June 30, 2016 was down from $US455 million in the previous corresponding period.
The fall was mainly due to $US283 million adverse discount rate adjustment as risk-free rates used to discount net outstanding claims decreased. This compared to a discount rate benefit of $US45 million in the first half of 2015.
This was largely driven by ultra low global interest rates and market volatility since Britain voted in June to leave the European Union. It also includes Australia where official interest rates have fallen three times in the past 15 months, while official bond yields have hit record lows.
But the fall in global rates has been going on now for 18 months or more – but not in the UK until this year in the lead up to the Brexit vote on June 23, and in the aftermath when the Bank of England cut its key rate to 0.25% from 0.50% and some short term rates went negative.
Negative interest rates have been a feature of the Japanese and some eurozone markets for some maturities for months now (Germany especially).
This means the insurance industry has to guard against a sharp spike in bond yields in their portfolios (which would trigger huge losses if sustained), and they have to put aside more money to meet future claims because their earnings will not be enough to cover them (at current rates).
Cash profit after tax fell 39% to $US287 million. Gross written premium income was flat on a constant currency basis but underwriting profit fell 5% to $US337 million. And while the dividend was raised by a cent, QBE pointed out that it will only be 50% franked for this year and next,which investors will not like.
"The payout for the 2016 interim dividend is A$288 million or 74% of cash profit, above the Board’s revised full year 65% payout policy. In arriving at the interim dividend, the Board gave consideration to the unusual market conditions that gave rise to the lower risk-free rates used to discount net outstanding claims, as well as the Group’s overall capital position and profitability.
In order to maintain franking stability, the combination of a higher dividend payout ratio and increased profitability of non-Australian operations warrants a reduction in the target franking rate to 50% for the 2016 and 2017 dividends. And then there’s the problems in the Australian market, especially NSW, which have seen a senior executive lose his job.
“While the interim result is broadly in line with our expectations, QBE’s business is not immune to macro conditions that are challenging the returns of all insurance companies,” QBE directors said yesterday.
“This is particularly evident in our Australian & 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 (CTP) scheme.
"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.
"We have also changed the leadership of the Australian & New Zealand Operations. While retaining some of his existing Group CFO responsibilities, Pat Regan will take responsibility for the Australian & New Zealand business while we undertake a search for a permanent CEO for the division. Tim Plant will be leaving QBE effective immediately.
“Cash generation remains strong and our balance sheet and expected retained earnings growth is more than capable of supporting our 3% per annum across the cycle premium growth target,” directors said. And the company has lowered its full year targets from gross and net written premiums, while the insurance margin will be weak because of the impact of the lower risk free rates.
QBE cut its full-year guidance range for gross written premium (the amount of money it takes in premiums from customers each year), from a top of $US14.6 billion to a top of $US14.1 billion.
Given all that, its no wonder the shares were hit hard- losing 11.5% of their value in early trading before steadying to be down 8.3% at $10.25.
