Earnings scorecard: top three finding their feet
The big three of Australian insurance appear to have their mojos back after below-par pricing growth and above-normal natural catastrophe losses over the past few years.
In the latest results, QBE leads the way with half-year statutory net profit rising 4% to $US358 million ($492.5 million) – a sign that CEO Pat Regan’s move to sell the troubled Latin American operation and US personal lines businesses to streamline the business model is paying off.
The insurer has also sold its business in Thailand and announced earlier this month a deal to sell its Australian travel insurance arm to Nib.
“QBE has historically been too complex, in terms of both geography and product mix,” Mr Regan says. “Our objective is to simplify the business so QBE operates only in markets and products where we have a competitive advantage and can deliver attractive returns and profitable growth.”
The group enjoyed an average premium rate increase of 4.6%, a significant jump from 1% in the corresponding period last year.
Gross written premium (GWP) grew 4% to $US7.9 billion ($10.9 billion), driven mainly by its key North American and European operations.
Crucially for QBE, the North American arm increased its pre-tax insurance profit to $US132 million ($181.6 million) from $US71 million ($97.7 million), and the combined operating ratio strengthened to 95.4% from 98.3%.
The Australian and New Zealand operations enjoyed strong pricing conditions, with premium rates up an average of 6.6%, excluding impacts from changes to the NSW compulsory third party scheme.
“If you look at the results, clearly things are on a positive momentum for QBE,” Moody’s Investors Service VP and Senior Credit Officer Frank Mirenzi told insuranceNEWS.com.au.
“I think it is on the right path. What it has done to date is obviously starting to yield results.
“I expect if it continues on this path, it should be in some better shape over the next 1-2 years, bearing in mind there is always the unknown of what natural catastrophes are around the corner and what costs that brings.”
Mr Mirenzi says dumping underperforming assets was the right move, allowing QBE to redirect resources to areas that make better commercial sense.
“Clearly, Latin America and some of the Asia-Pacific businesses it has are small and competitive and hard to build scale.
“If you need to get both volume growth and some kind of competitive pricing and if you can’t achieve that, you have to think about whether that is the best deployment of your capital.”
For rivals Suncorp and IAG, the headline numbers do not paint the full picture.
Full-year net profit may have declined, but the two insurers have pricing momentum on their side, which bodes well for future earnings prospects barring a Cyclone Debbie-style disaster.
Programs to reduce costs and withdraw from non-performing businesses, similar to QBE, will provide further support.
Suncorp achieved an average premium rise of 3.8% in its core Australian home and motor portfolios, and it expects the growth trend to continue this financial year.
“I think it’s a good set of results,” Bell Potter Securities Head of Research and Insurance Analyst TS Lim told insuranceNEWS.com.au. “I think that premium growth will continue to be strong, with rate rises still coming in on the consumer side.”
Mr Mirenzi from Moody’s believes it may be premature to write off CEO Michael Cameron’s controversial Marketplace strategy, which involves more than $100 million in investment.
A long-term perspective is usually required for an investment of this scale, he says. “It’s very early to make an assessment about whether it’s working or not working – time will tell.
“Obviously, the equity market looks and sees a cost involved with putting that into play today for something where the benefit may be realised a year, two years, or even three years from now.”
Morgan Stanley analysts say IAG has turned in a “solid result” despite a 0.6% fall in full-year net profit to $923 million.
Short-tail lines achieved rate growth of 4-5% and commercial rates enjoyed average price momentum of 5% in Australia.
“Looking out to [this financial year] for our Australian business… We’re expecting continued premium growth, predominantly rate-driven,” IAG CFO Nicholas Hawkins says.
During the year a simplified structure was embedded, including the single combined Australia Division under Mark Milliner.
“Our optimisation program is progressing to plan and we expect to see a benefit of about $100 million pre-tax [this financial year],” IAG MD and CEO Peter Harmer said.
“We also announced the sale of our operations in Thailand, Indonesia and Vietnam, which are expected to complete [this year] and deliver a net profit after tax in excess of $200 million.”