Shares in global insurer, QBE edged higher in yesterday’s widespread sell-off despite it telling shareholders that premiums will fall this year because of intensifying competition and weak economic growth.
“On average, insurance pricing across our business decreased 1.3 per cent in 2015, and we anticipate similar declines in 2016,” QBE chairman Marty Becker told shareholders at the company’s annual general meeting in Sydney yesterday.
"As a result, and coupled with relatively benign catastrophe loss activity in recent years, insurance pricing is being dragged down at the same time as investment returns remain well below historic levels.
“In this environment, insurers have no alternative but to focus their efforts on high quality underwriting, efficiency and cost reduction,” Mr Becker said.
The company’s shares rose 2,3% to $11.46 shaking off the sell-off triggered by the Reserve Bank’s surprise rate cut yesterday (which will be bad news for insurance companies like QBE), worries about the stability of some of the world’s biggest banks, and the surging value of the yen and the euro against a tanking greenback.
QBE posted a cash profit of US$893 million ($A1.19 billion) in 2015 in its best performance for four years.
But the company’s share price has fallen more than 16% in the past year, while the ASX 200 is down more than 9%.
Mr Becker said he is conscious of the company’s volatile share price, which has traded as high as $15 and as low as $9.50 in the past 12 months. “There is one important element that we cannot totally control – and that’s the share price," he told the meeting.
Investors have piled into QBE due to its link with global interest rate movements (global rates drive its returns on much of its provisions and its huge ‘float’ in the wake of the US Federal reserve signalling up to four rate rises this year in the wake of its rate increase in December.
But a slowing US economy, weak inflation and rising global volatility has seen the Fed chop its rate rises to possibly one, and perhaps two. Lately some indicators suggest the Fed may not move at all in 2016.
"The impact on QBE shares was compounded when the broader equities market fell sharply in early 2016," Mr Becker said.
QBE chief executive John Neal said he has earmarked $US150 million in cost cuts for this, which will result in a 1% improvement to the group’s expense ratio.
He expects the company to net gross written premium of between $US14.2 billion to $US14.6 billion, and a combined operating ratio target range of 94% to 95%.
“Notwithstanding the difficult operating landscape, we believe that maintaining our strong underwriting discipline will position us to manage risk and achieve a fair profit margin for our investors," he said.
But the warning about weakening premium growth at yesterday’s AGM recalls remarks buried in the Reserve Bank’s recent Financial Stability Review: "Profitability of the general insurance industry declined in 2015, reflecting lower investment income and a deterioration in underwriting results as insurers faced strong competition for commercial lines of business. While these pressures appear to have subsided somewhat through the year, there is little sign of an imminent rebound in profits. Lenders mortgage insurers’ (LMIs) profitability has also been reduced as some banks switched to offshore insurers and the volume of high loan-to-valuation (LVR) loans declined in response to tighter lending standards. Given these developments, insurers’ pricing policies and the adequacy of their claims reserves warrant ongoing attention.“
In other words regulators will notice the remarks to QBE’s meeting yesterday and put the company on a sort of watch list to consult as premium renewals start flowing, especially for reinsurance where competition is intensifying because of over-capacity.
The problems being generated by the weak share price performance has seen the company go on a campaign to improve communications.
"In addition to the usual schedule of investor meetings around the globe, next week (Tuesday) we will host QBE’s first Investor Update in our Sydney head office. The presentation will be released to the ASX ahead of time and the event will be webcast, providing all investors with the opportunity to hear Group and divisional management discuss their plans for the next three to five years,” Mr Becker said.
And CEO John Neal said the first quarter performance had been pleasing.
"I can confirm our performance for the first three months of the year is in line with the targets we communicated to the marketplace in February of this year. Of course, these targets specifically exclude the impact of discount rate movements which as of last Friday was an adverse impact of around $130 million,” he told the meeting.
"While the rating environment remains challenging and competition is as strong as I have seen, renewals to date suggest premium rate reductions are trending broadly in-line with our FY16 expectations.
"Against this backdrop, I am pleased to report that gross written premium for the first quarter is up by approximately 3% compared with the corresponding.
period in 2015 (on a constant currency basis and excluding the sold Argentine workers’ compensation and Mortgage & Lender Services businesses). "Our strong cost management culture is now embedded in the business and as a result, expenses are running comfortably below last year’s level. "Investment markets were extremely challenging in the first quarter but returns improved in March and further still in April. An investment return of 2.4% for FY16 remains our central case,” Mr Neal said.
