QBE released an acceptable result, reflective of tough trading conditions. Gross Earned Premium (GEP) decreased 10%, with currency movements being a factor in all regions (QBE reports in USD). On a constant currency basis GEP increased 1%. Net earned premium (an insurance equivalent, sort of, to revenue in the period), was down 14%, and it was down across all geographies, as well as for QBE's reinsurance business. It was 6% down on a constant currency basis, with QBE increasing its reinsurance (which should reduce future earnings volatility), and reinsurance cost.
Insurance profit rose 2%. Insurance profit margin was 9.0%, at the lower end of the company's 8.5% to 10.0% target. All regions made a profit, with improvement in North America (assisted by strong crop performance), Europe, and a large improvement in Latin America. Australia & NZ's profit margin declined in USD terms.
Investment return was a muted 2.2%, reflecting the low interest rate environment globally. Overall cash profit (profit adjusted for non-cash items including amortisation and impairments of intangibles), the driver of the dividend, increased 9%, and it was up 21% on a constant currency basis. Net profit increased 1%,
QBE's capital position remains sound. The company intends to implement a further $150m of cost saving measures in FY-16. We look forward to seeing continued earnings growth from QBE in coming periods, especially from the North American operations.
In relation to QBE we shouldn't forget that although the company reports in USD, it is those figures in AUD terms which matter for the company's dividend and share price (both in AUD). Foreign currency exposure has muddied this result somewhat, but the stronger USD / weaker AUD is good for Australian domiciled shareholders such as us. We see this in the final dividend - 30cps fully franked to be paid for H2. For FY-15, the dividend increased 35% yoy.
QBE is favourably priced, and it offers diversification benefits and a positive exposure to a lower AUD. Operationally, it has made significant improvements in recent times, with further improvements to be made (to North America in particular) - this provides opportunity for earnings growth in coming periods.