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QBE posts weak half-year result

QBE Insurance (ASX: QBE) has released its interim results for the half year ending 30 June 2013. Overall the results show that the new management team appears to have stabilised the insurer, however its repositioning and cost-cutting drive is yet to boost the bottom line.

The results

  • Net earned premium flat at US$7.3 billion
  • Insurance profit down 18% to US$790 million
  • Net profit after tax (NPAT) down 37% to US$477 million
  • Combined operation ratio (COR) down 0.1% to 92.8%
  • Insurance profit margin down from 13% to 10.8%
  • EPS down 43% to US$0.358 cents
  • Dividend declared of A$0.20 cents down 50%

While at first glance, the percentage drops in earnings look worrying, the fall in insurance profit was entirely accounted for by the drop in investment income on policyholders’ funds, which fell from $436 million in 2012 to $260 million in 2013. Likewise, the fall in NPAT was due to the decline in investment income on policyholders’ funds and a decline in investment income on shareholders’ funds, which fell from $247 million to $134 million.

The better investment income achieved last year allowed for a much stronger overall result. With further declines in interest rates and bond yields, QBE’s profits are under further pressure this year. The positive however is that management has maintained QBE’s market leading combined operating ratio.

Outlook

  • Group net earned premium revised downwards to a target of US$15.3 billion
  • Underlying profitability in the US business (which has been a drag in the first half) set to improve in the second half with rate increases, normalising lender-placed insurance (LPI) claims and improving crop seasonality
  • A full-year target for a COR of 92% and insurance profit margin of 11%

The outlook for investment income in the near term looks weak and is largely outside of management’s control. However a keen focus on costs and operating metrics should position the company to not only improve profit margins in the current environment but also position the insurer for an improved interest rate environment.

Foolish takeaway

QBE is obviously still doing it tough. Just last month domestic competitor Insurance Australia Group (ASX: IAG) flagged that it expected to report a full year insurance margin of 16.8% to 17.2% — QBE is obviously a long way from these levels at present. However shareholders with a medium-term investment horizon have reason to be optimistic with QBE well positioned to benefit from an improving US insurance and interest rate environment.

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Motley Fool contributor Tim McArthur owns shares in QBE Insurance.

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