QBE shares fall despite 100% rise in first-half profits

QBE Insurance Group Ltd. Shares (ASX:QBE) are down on Friday.

In morning trading, shares of the insurance giant were down nearly 5% at $15.58.

This follows the release of the ASX 200’s half-year results.

QBE shares fall after half-year results

• Gross written premiums (GWP) increased by 1.9% to USD 13,051 million
• Net insurance revenue increases by 6.7% to USD 8,512 million
• Combined operating ratio of 93.8%
• Net profit after tax up 100% to $802 million
• Interim dividend per share up 71.4% to 24 Australian cents

What happened during halftime?

For the six months ended June 30, QBE’s GWP increased 1.9% to US$13,051 million.

Management notes that its momentum continues with constant currency growth of 2%, or 6% excluding Crop, and 11% after further adjusting for exited portfolios. Strong growth of 12% was achieved in International, while portfolio exits resulted in a stable premium in Australia Pacific and a 6% reduction in North America.

Another positive is that the combined operating ratio improved to 93.8% from 98.8% the year before. As a reminder, anything below 100% is profitable for insurance companies. The lower the number, the better. Management said this reflected continued growth in premium renewal rates, lower catastrophe costs and more stable reserve developments.

This ultimately helped QBE increase its net profit after tax by 100% to US$802 million, allowing its board to increase its interim dividend by 71.4% to 24 Australian cents per share.

However, the former is lower than the $818 million expected by Goldman Sachs, which could explain some of today’s selling.

Management Comment

QBE Group CEO Andrew Horton said he was pleased with the company’s performance during the half-year. He said:

We had a positive start to the year, with continued improvement in our underwriting performance and strong return on equity. We have taken further steps to reduce volatility and secure stronger performance in North America, and remain enthusiastic about the outlook for our business.

During the period, we implemented a series of important initiatives aimed at strengthening resilience and consistency. The shape and health of our underwriting portfolio has improved significantly in recent years and, as a result, our priorities are now more focused on the future.

Horton also discussed the closure of the North American mid-market business and expects this to improve the company’s performance. He said:

We announced our decision to proceed with the orderly closure of the North American mid-market, which confirms our commitment to continue to optimize our portfolio and improve our performance in North America. This will allow us to refocus our North American strategy on businesses with greater market position, relevance and scale.

Perspectives

Management has provided guidance for the full year. It expects:

• GNP growth at constant exchange rates of around 3%
• Combined operating ratio of approximately 93.5%

This outlook also appears to be below expectations and could explain the fall in QBE shares today. For example, Goldman Sachs expected GDP growth to be in the single digits for the full year.

After today’s decline, QBE’s share price is now largely flat over the past 12 months.