QBE Insurance Group
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 28 February 2017, 9:31 AM
- Sectors Covered:
- Insurance, Diversified Financials
Results ahead on most metrics
QBE Insurance Group's (QBE) FY16 NPAT of A$844m was 10% above Bloomberg consensus (A$763m), with the result better than expected on most measures. FY16 insurance profit of A$1.07bn was 9% above consensus (A$985m) with the combined ratio (excl. discount rate movements) of 93.2% better than management's target range of 94-95%). FY16 GWP of ~US$14bn was also at the top end of guidance (US$13.7bn-US$14.1bn).
QBE's strong PCA capital position (1.79x) has enabled management to announce a three-year cumulative on-market buyback of up to A$1bn.
ANZO turnaround faster than expected
The key positive result for FY16 was the significant improvement in the Australia and New Zealand business (ANZO) attritional claims ratio in 2H16 (58.6%) versus 1H16 (62%). In lifting this ratio 340bps in the half, management has shown significantly faster traction in addressing the claims inflation issues in NSW CTP and trade credit insurance, than what is (in our view) typically the case with such remediation work.
Management put the turnaround down to significant achieved price increased (+18% in CTP) and changes in selection/underwriting. However, while management expects further improvement in FY17, it did caution that the trajectory is likely to be slower than 2H16.
Improvement in North America, although heavily crop assisted
QBE's North America (NA) business COR, on a comparable basis, improved from 99.2% in FY15 to 97.8% in FY16. While this is encouraging, we understand the outcome was heavily assisted by an outstanding crop insurance result, which largely offset significant challenges in commercial auto insurance. Excluding crop insurance and M&LS, we understand the NA attritional claims ratio improved more marginally, although future periods will benefit from termination/reinsurance of the monoline commercial auto portfolio. This portfolio recorded an FY16 loss of US$105m and was a key driver of the FY16 reserve top up (US$121m or 3.7% of NA NEP).
Investment view
This was a good result by QBE in our view. Issues in the Australian franchise are being addressed quickly and there is further progress on the broader group turnaround. However, post the recent rally in QBE's share price, which we attribute mainly to rises in US bond yields, we see QBE as trading closer to fair value on ~15.5x FY17F PE. We upgrade cash EPS by ~1.5%, and maintain our Hold recommendation.
More information
Morgans clients can login to view further detailed analysis and share price target for QBE Insurance Group (QBE). Alternatively, please contact your nearest Morgans office for access.
Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.