Investment Thesis:
- On valuation grounds, QBE trades in-line with fair value.
- Solid FY23 guidance.
- New CEO announced a fresh perspective and potential rebasing of earnings.
- As a global insurer, QBE’s operations are much more diversified than domestic peers which means insurance risk is more spread out.
- Solid global reinsurance program should insulate earnings from catastrophe claims.
- Expected prolonged period of lower interest rates (which does not benefit QBE’s investment portfolio).
- Committed to the share buyback program.
- Undertook a simplification process and sold non-core operations.
Key Risks:
- Prolonged period of pricing pressures.
- Adverse CAT claims.
- Ongoing prolonged period low interest rates and volatility in credit spreads which affects QBE’s predominately defensive portfolio.
- As a global insurer, QBE’s operations are much more diversified than domestic peers which means insurance risk is more spread out. However, at the same time, as it underwrites across the globe, the business it is more difficult to forecast and analyse claims and pricing environment as well as reinsurance.
- Undesirable investment returns below management guidance.
- Prolonged poor performances in Asia.
Key Highlights:
- Relative to the pcp, in US$ and on a statutory basis: gross written premium (GWP) of $11,552m was up from $10,203m, whilst net earned premium of US$6,789m was up from $6,571m. Adjusted GWP of $11,609m was driven by Group growth of +18% on a constant currency basis, or 13% excluding Crop. QBE saw ongoing growth across all divisions, with North America, International and Australia Pacific, up +24%, +19% and +6% respectively. QBE saw average renewal premium rate increases of +8.1% (North America, +10.4%, International, +7.0%, Australia Pacific, +9.1%), versus 9.7% in 1H21.
- Combined operating ratio (ex risk-free rate) of 94.1% versus 93.3% in the pcp. On an adjusted basis, QBE’s combined operating ratio of 92.9% versus 93.3% in the pcp reflected higher rate increases and premium growth, lower net catastrophe costs and improvement in acquisition costs.
- QBE achieved a poor total investment loss of $(840) m or (3.0) %, compared with return of $58m or 0.2% for the prior period, mainly as a result of unrealised losses associated with the significant increase in bond yields during the period.
- According to management, “adjusting for the impact of changes in risk-free rates on fixed income securities, the total investment return was $14m or +0.1% for the half, a decrease from 0.7% in the prior period. In fixed income, the core yield from the portfolio was almost fully offset by adverse credit spread marks, and within risk assets, the returns from infrastructure and unlisted property were largely offset by unrealised losses on equities and enhanced fixed Income”.
- NPAT of $151m was down from $441m, whilst adjusted net cash profit after tax of $169m was weaker than the $463m in the pcp.
- Probability of adequacy of 91.7% remains robust (versus 92.3% in the pcp).
- The Board declared an interim dividend of A9cps, down from A11cps in the pcp, and reflects a pay-out ratio of 57%.
Company Description:
QBE Insurance Group Ltd (QBE) is a global general insurer that underwrites commercial and personal policies across North America, Australia and New Zealand, Europe and emerging markets. QBE’s Equator Re segment is its captive reinsurer, providing reinsurance protection to the entire Group’s operating divisions.
(Source: Banyantree)
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