Market shrugs off QBE's higher profit

Large claims halve, but the market obviously wanted more

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 17, 2012 11:52 am AEST

QBE Insurance Limited (ASX: QBE) has today reported a net profit of US$760m for the six months to June 2012, a 13% increase over the previous year. The company declared a 40 cent dividend, franked to 15%, compared to last year's 62 cent dividend.

A fall in the cost of large individual risk and catastrophe claims helped the company's bottom line as did a fall in the ratio of claims paid to premiums received and a strong investment performance.

2011 was a horror year for insurance companies globally, with unprecedented weather events causing massive damage which resulted in a wave of insurance claims. In the first six months of 2011, QBE received US$1,080m in large individual risk and catastrophe claims, whereas in this period the company received just US$592m.

The ratio of claims paid to premiums fell from 49.3% to 48.5% in 2012. When the company is writing billions of dollars of insurance, small percentage changes can make a big difference to net profit.

Investment income improved over the year with the gross yield on policyholders' funds rising from 3.6% to 4.7%. With the majority of policyholders' funds held in government securities, this is a good result, considering US government bond rates are close to zero.

Insurance companies make money in two main ways, by ensuring that the premiums they receive outweigh the sum of claims they have to pay out plus underwriting and commission expenses, and as mentioned in the paragraph above, by receiving income on investing policyholder's funds. The first way is called the combined ratio. If claims and expenses are more than premiums then the combined ratio will rise over 100%, anything below 100% means the company has made a profit on its insurance business, and the lower the ratio, the better.

QBE's combined ratio fell from 95.7% to 92.9%.

Many insurance companies are quite happy with a combined ratio over 100%, as long as the income they earn by investing policyholder's funds covers the losses on the combined ratio. As some examples, Insurance Australia Group (ASX: IAG) had a combined ratio of 105.3% in the first half of this year, while Tower Limited (ASX: TWR) had a ratio of 95% for the six months to March 2012, and Suncorp Limited's (ASX: SUN) ratio was 107.3% for the six months to December 2011.

QBE targets a combined ratio of 90%, which would be an excellent result if they could achieve that every year. The company also reported an insurance profit margin of 13%, which was an improvement on last year's 11.% and in line with the company's previous guidance.

The Foolish bottom line

The market didn't appear to like the result, with QBE's shares down 7% at 11am today. The fall is most likely due to analysts expecting a higher net profit. Foolish investors should pay no heed to the daily market movements based on expectations. QBE suffered a horror year in 2011 – this result shows that QBE has done well in the first six months of this year.

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Motley Fool writer/analyst Mike King owns shares in QBE. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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