The QBE Insurance Group Ltd (ASX: QBE) share price climbed 7% to $10.91 following the release of its half year results. This follows on from Insurance Australia Group Ltd's (ASX: IAG) annual results yesterday. Here's what you need to know about QBE (all figures in US Dollars):
- Revenue fell 6% to $7,347 million
- Net profit after tax grew 4% to $370 million
- Earnings per share of 26.4 cents, up from 25.1 cents in the prior period
- Interim dividend of 22 cents per share, flat on last year
- Combined operating ratio (COR) of 95.4% improved from 96.8% last year
- $3.2 billion in total borrowings, down from $3.5 billion
- Net tangible assets of US$4.30 per share (approx. ~A$5.92)
- Management outlook for continued simplification of QBE
- Outlook for operating ratio of 95%-97% in 2019, and investment returns between 2.25% and 2.75%
So what?
QBE also reported that its Latin American operations are considered held for sale (and not included in the above profit figures) but their profit after tax improved from $340 million to $358 million during the half.
The company's combined operating ratio (COR) also improved, falling from 96.8% in the first half of 2017, to 95.4% this half. A combined operating ratio is, in simple terms, a measure of premiums received, minus operating costs and claims. A ratio below 100% means that the company's insurance businesses were profitable.
A ratio above 100% means that the company lost money – and QBE has had ratios above 100% several times in recent years as it struggles with a variety of operational problems and severe weather events. In that regard, it was good to see QBE's numbers move in the right direction, and management's comments around the ongoing simplification of the business.
Now what?
The company's outlook for 2019 was modest, with an approximately similar operating ratio (95%-97%) and investment returns of around 2.5%. However it was encouraging to see QBE improve its investment in its "Brilliant Basics" program so it can be a "Smart Insurer" and "Make Lots Of Profit" (OK I made the last two up). After a pilot version in late 2016, QBE is implementing Brilliant Basics across its entire business, which involves:
Judging by the performance of the past few years and the decision to sell several of the businesses, it's an overhaul process that QBE has been in need of.
It will likely take another year or two (or more) for the benefits to be felt but if QBE can improve its underwriting performance and keep costs constrained, the company could generate a consistent improvement in its profitability and business performance.
Based on estimated full year results, QBE looks to be priced at around 14x full year earnings, which is not expensive for an insurer that is improving its performance, exposed to a stronger USD, all against a background of rising interest rates.
For those patient enough to hold through what I am sure will be a lengthy turnaround process, I would look closer at QBE here.
