QBE Insurance Group: Generally supportive tailwinds

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
06 May 2022, 8:00 AM
Sectors Covered:
Insurance, Diversified Financials

  • QBE Insurance Group (ASX:QBE) has given a performance update as part of an investment conference.
  • In our view, there were some pros and cons in this announcement, but the good outweighed the bad. Cutting through the noise, the key takeaways were; FY22 COR guidance has been largely re-affirmed, 1Q22 GWP growth was very robust (+19% on pcp), and QBE’s investment yield is rising with increasing interest rates.
  • We lift our QBE FY22F/FY23F EPS by ~2%/20%. Our earnings changes reflect mainly higher GWP forecasts and higher investment returns given recent interest rate rises. Our price target increases to (login to view).
  • Maintain ADD. We believe tailwinds like strong premium increases and rising bond yields will drive an improved earnings trajectory for QBE over the next few years and we see the stock as inexpensive trading on ~12x FY23F earnings.

Event

QBE has given an update as part of an investment conference. The key points were;

1Q22 GWP growth was +19% on the pcp, and +22% on a constant currency basis. QBE has seen average renewal rate increases of +7.9% in 1Q22, with growth, ex rate increases, of +18% (albeit supported by growth in segments like Crop and QBE Re where GWP is heavily weighted to the first quarter).

1Q22 catastrophe claims experience has remained elevated due to flooding and storms across Australia, and Storm Eunice in the UK/Europe. However, catastrophe claims in the quarter were in-line with QBE’s 1Q22 allowance.

QBE also expects claims of ~US$75m tied to the Russia/Ukraine conflict (to be reported as catastrophe claims).

QBE will reinsure the legacy North America Excess and Surplus (E&S) prior accident year liabilities to reduce reserving volatility, which will cost US$50m in FY22.

Higher risk-free rates and slightly wider credit spreads mean the 1Q22 exit running yield on QBE’s fixed income investments is 1.52% vs 0.68% in FY21. The overall exit yield on QBE total investment assets (including growth assets) is 2%.

QBE has reaffirmed its combined operating ratio (COR) guidance for FY22, with an improvement on the FY21 ‘exit’ COR of 94% expected.

Analysis

In our view, there was some pros and cons in this update, but the good outweighed the bad. Cutting through the noise, we see FY22 COR guidance (<94%) being largely re-affirmed as an update positive, despite some one-offs (Ukraine, NA E&S reinsurance).

Meanwhile 1Q22 top-line growth (+19% on pcp) is well above FY22 guidance (‘high single digit range’), while QBE is seeing the benefits of yield curve increases coming through investment returns, which is beneficial for future year earnings.

Reinsuring the NA E&S book, which seemingly had been a key driver of the North America reserve top ups in recent periods, should further solidify future earnings and reduces risks.

Forecast and valuation update

We lift our QBE FY22F/FY23F EPS by ~2%/~20%. Our earnings changes reflect particularly higher GWP forecasts and higher investment returns on QBE’s investment book on recent interest rate rises. Our PT rises to (login to view).

Investment view

With premium rate increases still flowing through QBE’s insurance book, further cost-out benefits to come, and the benefits of rising investment yields emerging, we expect QBE’s earnings profile to improve strongly over the next few years.

QBE also has a robust balance sheet, and we see the stock as inexpensive trading on ~12x FY23 earnings. ADD maintained.

Risks

Key risks to our ADD call are:

  1. Higher claims than expected
  2. Volatile investment markets
  3. Competition in insurance markets
  4. Reserve top-ups; and
  5. Unforeseen negative regulatory changes.

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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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