QBE Insurance Group: Best result in a long time
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 13 August 2021, 8:00 AM
- Sectors Covered:
- Insurance, Diversified Financials
- QBE Insurance Group’s (ASX:QBE) 1H21 NPAT (US$441m) was comfortably ahead of Factset consensus (US$316m), with the 1H21 DPS (A11cps) also above expectations (8cps).
- Overall, we saw this as a good result, with very strong top-line growth (+20% constant currency), It was QBE’s best combined ratio in almost a decade (93.3%), and there was no real negative news.
- We lift F21F/FY22F EPS by 2%-3% on higher top-line and insurance margin (IM) forecasts. Our PT rises to (login to view) on our earnings changes and valuation roll forward.
- With strong rate increases still flowing through QBE’s insurance book, and further cost-out benefits to come, we expect QBE’s earnings profile to improve strongly over the next few years. Maintain ADD.
A solid result overall
QBE’s 1H21 NPAT (US$441m) was comfortably ahead of Factset consensus (US$316m), with the 1H21 DPS (A11cps) also above expectations (8cps). Overall the result delivered very strong top-line growth (20% on pcp, constant currency basis) with improving underlying profitability.
We thought negatives were hard to find, with broad outlook commentary pointing to likely further margin improvement from here and continuing strong rate increases, with a 13% expense ratio (currently 13.7%) the target by FY23.
1H21 GWP (US$10.2bn) grew by 20% on pcp (on a constant currency basis) with management noting 7% volume growth and group wide average rate increases of 9.7%. Management noted strong rate growth continued in all products and regions.
The reported combined ratio (93.3%) was down on pcp (97.4%) and was QBE’s best performance in almost a decade. The group attritional claims ratio (ACR, 43.7%) declined 1.8% on FY20, with management believing it is reasonable to anticipate further ACR improvement given strong current rate increases.
QBE saw positive prior year development of 1.1% of NEP (versus 2.2% of adverse development in pcp), with modest positive development seen in all divisions.
The group expense ratio (13.7%) was down on the pcp (14.3%) reflecting cost control and operating leverage as a result of strong premium growth.
QBE remains confident the A$655m COVID provision recognised in 2020 remains sufficient and that the A$130m of COVID claims expected to be incurred in FY21 may prove excessive.
Some smaller areas of weakness
Catastrophe claims of US$462m were higher than 1H21 allowances (US$310m) impacted by events like Winter Storm Uri in Texas.
The Australia business ACR (49.6%) was relatively flat on the pcp (49.3%).
Management was cautious on the outlook for claims inflation, noting some temporary signs of inflation in short tail classes due to supply shortages and increased labour costs.
Guidance for a 95% crop COR might prove optimistic, given drought conditions prevalent in certain states.
While rate increases remain robust, management noted some signs that rate increases are moderating in certain loss affected insurance classes, e.g. financial lines, which have already seen strong rates increases.
Changes to forecasts
We lift F21F/FY22F EPS by 2%-3% on higher top-line and IM forecasts. Our PT rises to (login to view) on our earnings changes and valuation roll forward.
With strong rate increases still flowing through QBE’s insurance book, and further cost-out benefits to come, we expect QBE’s earnings profile to improve strongly over the next few years.
The stock also has a robust balance sheet and remains relatively inexpensive overall, trading on ~15x FY22F PE. ADD maintained.
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