QBE Insurance Group: Some comfort in the detail

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
21 February 2022, 3:30 PM
Sectors Covered:
Insurance, Diversified Financials

  • QBE Insurance Group’s (ASX:QBE) FY21 NPAT of US$750m was versus a loss of US$1.5bn in the pcp, but was ~10% below Bloomberg consensus (US$858m).
  • While acknowledging some issues with the result, e.g. the earnings miss, broader guidance than expected etc, we thought the underlying result detail actually still painted a reasonable picture into FY22.
  • We lower QBE FY22F/FY23F EPS by 9% and 5% on lower margin assumptions offsetting strong top-line growth estimates. Our PT is reduced to (login to view). ADD.

Event

QBE’s.FY21 NPAT of US$750m compared to loss of -US$1.5bn in the pcp, but was ~10% below Bloomberg consensus (US$858m). The 2H21 dividend of A19cps was above consensus of ~A17cps.

The result miss versus consensus appeared mainly driven by more ‘one-off’ factors, e.g. higher claims events than expected and some reserve top ups.

QBE is guiding to high-single-digit GWP growth into FY22 and a further improvement in the underlying combined operating ratio (COR) to <94% (FY20 95%). QBE has lowered its payout ratio target to 40%-60% (previously <65%) as the company retains more capital to support growth.

The good

  1. FY21 statutory GWP (US$18.4bn) grew 22% on pcp, with NEP (US$13.7bn) being 4% above consensus (US$13.4bn);
  2. Group-wide average premium rates were ~+10%, and while QBE said rate increases moderated in International in 2H21, rate rise accelerated in North America and Asia Pacific in this period;
  3. QBE’s underwriting performance improved with the FY21 claims ratio, ex cats (57.4%) being down 1.4% on the pcp;
  4. QBE's combined commission and expense ratio (28.5%) also fell 2.2% on the pcp reflecting higher leverage and premium rate rises;
  5. The crop business reported a COR of 92.7% compared with 95.0% in 1H21 and 98.2% in 2020; and
  6. The group PCA multiple (1.75x) was above the mid-point of QBE’s target range (1.6-1.8x).

The bad

  1. Catastrophe claims (US$905M or 6.6% of NEP),were up materially on prior year (US$688M or 5.8% of NEP), and 0.9% above the group’s increased allowance;
  2. QBE saw FY21 adverse prior year claims development (-$192m) stemming from reserve strengthening in financial and liability lines and some discontinued business;
  3. QBE acknowledged CPI inflation is lifting notably across many regions;
  4. The International business claims ratio, ex CAT, was slightly up on pcp (53.1% vs 52.8%) with the benefit of premium rates in excess of claims inflation, being more than offset by stronger IBNR assumptions.

Key thoughts

While acknowledging some issues with the result, e.g. the earnings miss, broader guidance than expected etc, we thought the underlying result detail still painted a reasonable picture into F22. We note particularly;

  1. While acknowledging QBE missed FY21 consensus, arguably the drivers of this (weather events and provision top ups) are not re-occurring;
  2. While the market is concerned about inflation, QBE did say; FY21 inflation was in-line with expectations, QBE are holding higher IBNR claims reserves as protection against inflation risk, and strong industry price increases are expected to continue near term driven by inflation concerns;
  3. While FY21 COR guidance (94%) was somewhat broad, we anticipated some conservativism here given a new CEO, and we still see a low 90’s FY22 COR as achievable; and
  4. QBE remains well positioned to benefit from interest rate rises, despite indicating the roll through of these benefits will be somewhat gradual.

Changes to forecasts

We lower QBE FY22F/FY23F EPS by 9% and 5% on lower margin assumptions offsetting strong top-line growth estimates.

Our PT is reduced to (login to view).

Investment 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.

The stock also has a robust balance sheet and remains relatively inexpensive overall trading on ~15x FY22F PE. ADD maintained.

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