QBE Insurance Group: A solid enough AGM update

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
06 May 2021, 9:00 AM
Sectors Covered:
Insurance, Diversified Financials

  • QBE Insurance Group (ASX:QBE) has provided an update on its FY21 performance as part of its AGM commentary.
  • The two main points in our view, were; QBE delivering 13% 1Q21 GWP growth on pcp and the 1Q21 combined operating ratio being in-line with expectations (despite some known catastrophe events in 1Q21).
  • We lift our QBE FY21F/FY22F EPS by 17% and 4% respectively. Our earnings changes reflect the benefits of a +A$70m MTM gain in 1Q21 and a lift to our running yield assumptions for fixed income securities. Our QBE PT rises (login to view).
  • 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. We see QBE as relatively inexpensive versus the market, trading on 16x FY21F PE (ASX 200 = ~19x). ADD.

What happened

QBE has provided an update on its FY21 performance as part of its AGM commentary. The key points were

  1. QBE is still seeing strong top line rate increases of ~9% on pcp in 1Q21, while 1Q21 top line growth was +13% on pcp (on a constant currency basis)
  2. Despite some large first quarter events, QBE’s combined operating ratio (COR) was inline with management expectations
  3. The decision to adopt a slightly shorter asset duration versus the length of QBEs liabilities has seen a +A$70m 1Q21 mark-to-market (MTM) gain
  4. The average yield QBE is getting on its bonds has increased from 40bps to 50bps over the last quarter
  5. QBEs total capital ratio of 1.73x is per the mid-point of managements target range (1.60x-1.80x)

Our thoughts

There were two key positives in the QBE AGM commentary, in our view.

Firstly, the 13% 1Q21 top line growth on pcp shows recent rate increases are flowing through to GWP, albeit noting current group rate increase levels (~+10% on pcp in 1Q21) were down on the 4Q20 performance (~+12.5% on pcp). While QBE did observe that 1Q21 earned premium growth was lower than GWP growth (+6% vs ~+13% on pcp, on a CC basis), management believes earned premium growth will increase over the rest of 2021 in-line with premium earnings patterns.

Secondly, the 1Q21 COR coming in-line with expectations was a better outcome than we expected given numerous known weather events in 1Q21, e.g. NSW and QLD storms, and the Texas winter freeze, etc. Overall, in summary, it seems a solid enough 1 st quarter of 2021 for QBE, with reasonable outcomes across the board.

Changes to forecasts

We lift our QBE FY21F/FY22F EPS by 17% and 4% respectively. Our earnings changes reflect the benefits of the aforementioned +A$70m MTM gain in 1Q21 and a lift to our running yield assumptions on fixed income securities. Our PT rises (login to view).

Investment view

While FY20 was a difficult year for QBE, we think it concealed continuing underlying business improvement. With strong rate increases still flowing through QBEs insurance book, and further cost-out benefits to come, we expect QBEs earnings profile to improve strongly over the next few years.

We see the stock as relatively inexpensive overall, trading on ~16x FY21F PE, which is below its historic discount relative to the market (82% vs 87% of the ASX 200 level).

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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.

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