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QBE's 1H cash profit falls but dividend increases

Nicholas Grove  |  17 Aug 2016Text size  Decrease  Increase  |  

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The insurer raises its dividend despite a deterioration in its cash profit and combined operating ratio, as the macro environment continues to challenge returns.

QBE Insurance (ASX: QBE) on Wednesday announced a 39 per cent fall in cash profit to US$287 million for the half year ended 30 June 2016, but managed to raise its dividend by 5 per cent as strong cash generation offset the effects of challenging economic conditions.

Statutory net profit fell 46 per cent year over year to US$265 million, the insurer said in a statement to the ASX.

The insurer said its combined operating ratio--a measure of profitability used among insurers to measure performance--was up from 93.4 per cent in the prior comparable period to 99.0 per cent.

A ratio below 100 per cent means an insurer is making an underwriting profit, while a ratio above 100 per cent means it is paying out more money in claims than it is receiving from premiums.

QBE Group CEO John Neal said the insurer had managed to deliver a "solid" half-year result in an environment where both insurance pricing and investment markets are "increasingly challenging".

Neal attributed the decline in profit and combined operating ratio to a US$283 million-adverse discount rate adjustment as risk-free rates used to discount net outstanding claims decreased.

This compares with a discount rate benefit of US$45 million in the prior period, he said.

While the interim result is broadly in line with the company's expectations, Neal said QBE's business is not immune to macro conditions that are challenging the returns of all insurance companies.

"This is particularly evident in our Australian and 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 scheme," he said.

"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."

Positive story behind the numbers

Morningstar head of Australian banking research, David Ellis, expressed his disappointment with the result, with the headline cash profit well below his expectations.

However, the story behind the disappointing headline numbers remains positive, he said.

"Changes in the risk-free rate can move both up and down and QBE will benefit when long-term government bond rates eventually start to increase," Ellis said.

"Cost control is impressive and we expect more of the same during the next three years at least.

"The balance sheet is strong and remedial work on the Australian and New Zealand operations should bear fruit in 2017."

Neal said QBE's cash generation remains strong, while its balance sheet and expected retained earnings growth is more than capable of supporting the company's 3 per cent per annum across-the-cycle premium growth target.

As a result, QBE approved a 5 per cent or 1-cent increase in the interim dividend to 21 Australian cents per share, 50 per cent franked.

The payout for the 2016 interim dividend represents 74 per cent of cash profit, above QBE's revised full-year 65 per cent payout policy.

In order to maintain franking stability, QBE said 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 per cent for the 2016 and 2017 dividends.

The half-year dividend will be paid on 28 September 2016 to shareholders on record as of 26 August 2016.

Looking to the remainder of 2016, QBE said its combined operating ratio target remains unchanged at 94 per cent to 95 per cent.


Nicholas Grove is a Morningstar journalist.

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