Investors hit major insurer QBE yesterday, despite it expressing confidence at being still able to meet its full year 20% profit margin target after reporting a 7% dip in interim profit.
Buried in the commentary was the admission that the volatile markets in the first half had cut the company’s targeted returns on investments, leading directors to warn that the full year target of a 5.5% return on investments might be tough to achieve.
As well rising competition is making it tough to achieve its targeted premium income increases for the year.
The insurance giant recorded a net profit of $859 million for the half to June 30, compared to the $921 million in the 2007 first half. That was under the market consensus of $880 million.
The market dropped the shares to a day’s low of $22.45, before a bit of bargain hunting saw it pushed up to $23.40, down 51 cents.
QBE announced an insurance profit before tax up 6% to $1,116 million. The 7% dip in interim earnings was mainly due to that volatility in investment markets and the impact of translation to the stronger Australian dollar.
The interim dividend is 61.0 cents per share, up 7% from 57.0 cents per share.
The high value of the Australian dollar hurt in the half, as did the volatile markets in the first half:
"The first half of 2008 was the most difficult that we have experienced for a long time.
"The stronger Australian dollar substantially reduced the value of the overseas component of our cash and investment portfolio in Australian dollars by $1.4 billion.
"Fixed income markets were very volatile. US two year government yields fell from 3.1% at the beginning of the year to 1.3% by the middle of March only to bounce back to 3.0% by the middle of June and close the half year at around 2.5%.
"Other fixed income markets were equally volatile and the major equity markets on average fell by 14.5%.
"Partly offsetting these negatives were the stronger Australian interest rates and the interest rate differentials on the significant hedging of our overseas shareholders’ funds into Australian dollars.
"The adverse trends have meant that gross investment income for the half year was down substantially from $679 million to $513 million.
"The gross yield was 4.3% compared with 6.5% for the same period last year"
Realised and unrealized losses on equities were $86 million compared with gains of $82 million for the same period last year representing a net adverse movement of $122 million after tax.
The stronger Australian dollar adversely impacted profit after tax by an estimated $74 million.
The company warned that the downturn inequity markets and lower interest rates were putting pressures on it meeting its targeted returns on its investments in a full year.
With that first half return of 4.3% compared to the 6.5% in the first half of 2007, QBE admitted it will struggle to make its target for the full year of 5.5%
"The recent reduction in interest rates on our substantial US and UK cash and fixed interest portfolios will continue to impact investment income in the next six months.
“We had previously advised that our target gross investment yield for 2008 was 5.5%, including a 5% capital appreciation on equities.
"We will need a major rebound in the equity markets in the next few months to achieve our target.
“We are still cautiously optimistic of achieving our overall budgeted cash and fixed interest yields; however, foreign exchange volatility may again impact our investment income in the second half."
QBE said that "Insurance profit before tax for the half year increased by 6% to $1,116 million or 21.8% of net earned premium compared with 22.2% for the same period last year.
“Insurance profits were achieved in the majority of the 45 countries in which we operate.
Net earned premium was up 8% to $5,108 million but up 18% using constant exchange rates.
The insurer said it had "confidence that we can meet our insurance profit target for 2008 of around 20 per cent of net earned premium".
That target confirms guidance it gave at its annual general meeting in April this year.
But the company warned in its outlook:
"Competition for new premium income is aggressive so our expectations are that we will continue to remain below plan for new business for the rest of the year."
After announcing last week the $1 billion purchase of PMI Mortgage Insurance Ltd in Australia and New Zealand and PMI Mortgage Asia Ltd, QBE said yesterday that it would continue to look at acquisition opportunities to further build its geographic spread and product diversification.
"The acquisitions converted to date have enabled us to use a portion of our excess capital," QBE said on Thursday.
"We are experiencing increased acquisition activity with opportunities being presented in many of the markets in which we operate.
"We expect to convert some of these opportunities to optimize our capital and returns to shareholders."
QBE said it expected that acquisitions announced to date, including PMI Mortgage would add around $550 million in net written premier in the first full year and would assist profit after tax by around $160 million.
The PMI deal came around three months after Insurance Group Australia Ltd rejected QBE’s $8.7 billion indicative (but not formally made) takeover offer.
QBE’s gross written premium increased one per cent to $6.6 billion for the half compared to $6.5 billion in the 2007 first half.
Its net earned premium increased four per cent to $5.1 billion compared to $4.7 billion in the previous corresponding half.
"At current exchange rates, we now expect gross written premium to be around $12.5 billion and ne
