17 August 2016Insurance

QBE blames Brexit fallout for plunge in H1 profits

QBE blamed some of the fallout stemming from the UK vote to leave the European Union for a steep fall in profits in the first half of 2016 but its chief executive said it was too early to speculate what the longer term implications may be.

The company’s net profit was $265 million for the six-month period ending June 30, a 45.7 percent decrease from $488 million for the same period in 2015.

It said a significant fall in bond yields after the so-called Brexit vote contributed to an adverse discount rate adjustment of $283 million to QBE’s pre-tax profit for the half year as risk-free rates used to discount net outstanding claims decreased. This was in contrast to a benefit of a $45 million in the prior period.

John Neal, group chief executive officer of QBE, said that the company anticipates a modest incremental administrative cost if QBE is required to reorganise its continental European businesses to renew European Union business. He said there may also be a small capital impost associated with the new licensed entities.

But he stressed that more significant is the impact of Brexit on global confidence and global economic growth prospects and investment returns. However, lower interest rates and investment returns could also conceivable help underwriting margins, he said.

“If these lower investment returns provide a catalyst for the global insurance pricing cycle to turn, or at least stabilise, this may be a net positive for QBE. We will publicly update our medium-term targets in conjunction with the release of our 2016 final result in February 2017,” he said.

The company’s gross written premiums also shrank in the first half reaching $8.1 billion, a 6.9 percent decrease from $8.7 billion for the first half of 2015.

The company's combined operating ratio for the first half of 2016 was 99 percent, up 3.7 percentage points from last year.

Neal stressed the tough market conditions the company is facing globally.

“Across all industries, tough operating conditions call for a clearly defined market position and strategy. This is most evident in the insurance industry today, where we face headwinds caused by low interest rates and reduced insurance pricing,” he said.

“We started 2016 expecting premium rates to fall marginally and our experience to date suggests this assessment is valid. Meanwhile, global risk-free rates continue to trend lower – to the point that around 77 percent of global sovereign bond yields are now below 1 percent while around 40 percent are negative.

“These conditions challenge the returns of all insurance companies and our business is not immune. As I discuss later in this report, this is particularly evident in our Australian & New Zealand Operations where cumulative pricing declines concurrent with heightened claims inflation have detracted from performance in several of our short tail classes, exacerbated by the well-publicised deterioration in the NSW compulsory third party (CTP) scheme.

“Despite these challenges, we are well placed to continue to meet our underwriting targets in the short and medium term. I can say this because QBE’s business has strong foundations, including our diversification by product line and geography, supported by decisive action to introduce price increases and remediate emerging issues in Australian & New Zealand Operations.”

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