Low rates ‘drug’ may not be enough for growth, says QBE boss

In an interview, Mr Regan acknowledged the tailwind of rising insurance prices, but questioned whether ultra-low interest rates were enough to keep global growth afloat, and highlighted the need for “real consumption”.

“Without getting all Milton Friedman, the world has signed up to [low rates] being the stimulant that will keep markets and growth afloat. It’s quite unclear that that actually is true, because most economies around the world are slowing,” Mr Regan told the Sydney Morning Herald and The Age.

“And now… we’re stuck on that as a drug, because it’s difficult to raise interest rates now, isn’t it, with generally stagnated growth, with the exception of the US.”

Mr Regan, who has been CEO since early 2018, did not express an opinion on whether governments should use budgets to pick up more of the slack, but he did underline the need for something more than low rates to kickstart global growth.

“Rightly or wrongly, politics aside, it feels like there needs to be some actual consumption, as well as just low interest rates,” Mr Regan said.

Lower interest rates are negative for insurance profits, because they tend to cut investment returns.

There is also a domestic debate about the benefits of the Reserve Bank cutting interest rates further from 1.5 per cent, although Mr Regan said that in Australia there were a “specific set of circumstances” —  namely the housing market — which meant rates could play a bigger role here.

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Mr Regan made the comments came in a wide-ranging interview, in which he was optimistic about continuing the turnaround at QBE; he said its climate change policies would “evolve” in line with energy technology after  recently vowing to cut coal exposure; and he confirmed it would end its small position in add-on-insurance.

In his first year as CEO, Mr Regan last year offloaded a clutch of businesses that made underwriting losses of $US200 million in 2017, including operations in Latin America, Thailand, travel insurance in Australia, and personal insurance in America. He has also cut costs, tried to bring about greater consistency across the 31 countries where it operates, and moved to improve underwriting standards.

‘We’ll meet people’s expectations’

Andrew Martin, principal at QBE shareholder Alphinity, said Mr Regan should be given credit for “stabilising the ship” at QBE after two halves that have met or beaten expectations. Even so, he said there was a “lingering concern” about the surprises in the business.

“When you have such a lengthy period of underperformance and mishaps, I think it takes a while for the market to regain confidence,” Mr Martin said.

Shaw and Partners analyst Brett Le Mesurier also said more time was needed to judge if the improvements in QBE were sustainable. “We’ve had moments like this with new CEOs in the past, only to end up being disappointed,” Mr Le Mesurier said.

Mr Regan acknowledged the market caution towards QBE, but said this represented an “opportunity” for the business to continue on its journey to remove negative surprises, and he felt “good about what we’re doing in 2019.” He said he thought it could get return on equity “pretty close” to 10 per cent this year, up from 8 per cent last year.

“We’ll meet people’s expectations or beat them, and then you know we’ll bring more and more people on board with what we’re doing,” Mr Regan said.

QBE has also been under pressure from some investors over climate change, which Mr Regan acknowledged was a “material business risk”. In March it said it would stop investing in thermal coal by July, and cease underwriting thermal coal mines by 2030.

Science will evolve, what is needed as a fuel source today will change, other alternatives will come along.

Pat Regan, QBE chief executive

Activist groups and some shareholders have argued it should also be acting more decisively on oil and gas exposure, and while the company has defended its position, Mr Regan made it clear there will be further changes in its energy policy down the track.

“Science will evolve, what is needed as a fuel source today will change, other alternatives will come along. So yes, you would expect our policy will have evolved accordingly,” Mr Regan said.

Mr Regan also confirmed QBE expected to dump all of its remaining add-on insurance operations by the end of this year, after it stopped supplying such products sold through car dealers in 2017. “We are quitting the market,” he said of add-on products.