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QBE's FY16 earnings result surprises on upside

Glenn Freeman  |  27 Feb 2017Text size  Decrease  Increase  |  

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The global insurance company has reported a US$898-million cash profit and 33-cent dividend for fiscal 2016.

 

QBE Insurance Group (ASX: QBE) posted a 1 per cent year-on-year improvement in cash profit for the fiscal year ended 31 December, 2016 (FY16), as it shrugs off a run of disappointing results in recent years.

It realised gains across all key financial metrics, including US$844 million in net profit after tax, up 5 per cent on FY15; and a 9.7 per cent insurance margin, which was at the top-end of guidance and up from 9 per cent a year earlier.

The strong 2016 cash profit result was 18 per cent better than Morningstar's forecast, "and well ahead of consensus estimates".

"We are increasingly confident in our positive long-term view following several disappointing years," said Morningstar senior equity analyst, David Ellis.

Shareholders will receive a dividend of 33 Australian cents, 50 per cent franked, for the half--bringing the total FY16 payout to 54 cents a share--up from 50 cents in FY15.

Group CEO John Neal highlighted QBE's "corrective actions across underwriting and pricing, together with improved discipline in our claims management functions".

QBE's claims ratio improvement was particularly strong in the second half, contributing to its 113 per cent cash profit boost in 2H16.

The insurer reported a 93.2 per cent combined operating ratio (COR)--a measure of underwriting profitability that divides the sum of claims, commissions and expenses by net earned premium--significantly ahead of its 94-95 per cent guidance range. This was improved from 94.3 per cent in FY15.

In QBE's Australian and New Zealand business, the attritional claims ratio improved considerably in the second half, falling to 58.6 per cent, from 62 per cent in 1H16.

"We were surprised at the quicker than expected turnaround in the Australian and New Zealand business," said Morningstar's Ellis.

"QBE is combining increased reinsurance utilisation, tighter underwriting standards, reduced expense growth, premium repricing and good customer retention to deliver more consistent and higher-quality earnings and dividend growth."

Australian premium rate improvement gathered momentum across FY16, to 4.5 per cent in 4Q16, from negative 0.8 per cent, 0.4 per cent and 2.2 per cent in 1Q, 2Q and 3Q, respectively.

North America, which accounts for more than one-third of total group gross written premiums, reduced COR to 97.7 per cent in FY16, from 99.8 per cent in FY15, a significant improvement in profitability.

Outlook

Management flagged a continuation of challenging market conditions for insurers in 2017, although suggests modest improvements are beginning to emerge.

"The rate of decline in global pricing is easing and, while there is variation between markets, we anticipate the pricing in markets other than Australia will be broadly flat in 2017," said QBE's Neal.

"We are also encouraged by the improved US macroeconomic outlook following the presidential election, while investment income should benefit from higher bond yields in all major markets."

He tipped gross written premium would remain "relatively stable during 2017" because of the "still competitive premium pricing landscape and recent exchange rate volatility".

QBE's share price was $12.77 in late afternoon trade on Monday, a gain of 3.7 per cent on the day's opening price.

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Glenn Freeman is Morningstar's senior editor.

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