QBE's result was disappointing. It didn't meet market expectations either.
Insurance margins were down across all divisions except Emerging Markets (which increased marginally), to average 5.8% (reported). Europe, QBE's reinsurance business and Australia & New Zealand (which has traditionally been QBE's rock) all experienced large margin decreases. QBE is targeting an adjusted insurance margin (includes adjustments such as changes to risk free rates and risk margins) of 8.5% to 10% for the full year. This means that the statutory margin would need be around 7%. Thus, 5.8% is a material miss.
Gross Written Premium (consider this along the lines of revenue) is predicted to be down ~3.5% as compared to FY-15. We were expecting a small increase. This was a little disappointing also.
The positives of the result were the strong balance sheet: QBE has markedly improved its balance sheet and reduced gearing in recent periods. This afforded QBE the ability to increase its payout ratio to 65%, resulting in the 5% increase in the dividend for the half (as compared to H1 FY-15). Additionally, investment returns of 1.65% for the half were above the full year target (full year target is 2.7%). This result is pleasing, especially as QBE has a quite conservative asset allocation - 90.5% cash, fixed interest and infrastructure debt, and 9.5% growth assets - when others are heading up the risk curve.
Finally, QBE is retaining its insurance margin target of 8.5% to 10% (adjusted) for the full FY-16 year - including this recently completed half. In order to meet this it will need to have a turnaround in performance for H2 - this implies that the company clearly thinks the impacts on H1 are temporary in nature. And certainly half-on-half, insurance can bounce around.
Given the company's full year targets for the full FY-16 year, we do expect a turnaround to occur in H2. Also, it should be noted that the company is trading around book value - no recovery is being factored in the company's share price.