QBE Insurance Group: A hit from higher catastrophe claims, but not too bad

Author name:: By Richard Coles
Job title:: Senior Analyst
Date posted:: 22 November 2022, 8:00 AM
Sectors Covered:: Insurance, Diversified Financials

QBE Insurance Group (ASX:QBE) has given an investor update.
While FY22 catastrophe claims will come in a touch higher than QBE’s allowances (+~US$100m), we would argue this is still a reasonable outcome in what has been a very volatile year for weather (noting the global insurance industry is likely to see total claims >US$100bn).
We downgrade QBE FY22F EPS by 6% on higher claims costs than expected, but lift FY23F EPS by 5% on higher investment yield assumptions. Our target price is slightly reduced to (login to view).
Maintain ADD rating. We believe tailwinds such as rising bond yields, premium rate increases and cost out will drive an improved earnings profile for QBE over the next few years. The stock also remains inexpensive trading on ~10x FY23F earnings.

Event

QBE has provided an investor update.

3Q22 GWP was up +6% on the pcp or +13% on a constant currency basis. FY22 YTD GWP growth is +12% on the pcp and +16% on a constant currency basis. 3Q22 group wide average premium rate increases were +8.1% on the pcp (+8.2% in 2Q22).

Net catastrophe claims in the second half are tracking at US$430m and YTD catastrophe claims are at US$880m. QBE is allowing for another US$180m of catastrophe events in November and December and is forecasting total FY22 catastrophe costs (US$1.06bn) to exceed allowances (US$962m) by ~US$100m.

QBE has said claims inflation remains similar to the levels seen in the 1H22 result, with rate increases remaining at or above inflation in most insurance classes.

QBE expects some long-tail reserve strengthening in 2H22 to build resilience for a prolonged inflation environment, but these impacts are expected to be offset by the release of the COVID risk margin (on some favourable legal rulings in this area).

QBE’s crop insurance business is expected to do a FY22 combined ratio of ~96%.

QBE’s current yield on fixed income securities of 3.9% is up from an exit running yield of 2.8% at the end of 1H22. There has been a negative asset risk free rate impact of -US$461m in 3Q22, but this will be broadly offset by a similar movement in the claims liability discount rate.

Key thoughts

While FY22 catastrophe claims will come in a touch higher than QBE’s allowances (+US$100m), we would argue this is still a reasonable effort in what has been a very volatile year for weather (noting the global insurance industry is likely to see total claims >US$100bn).

We believe that in years gone by, the size of the claims blow-out for QBE in a similar scenario would have been much larger, reflecting the company’s efforts to improve underwriting quality in recent periods.

The higher running yield QBE is achieving on fixed income securities (now 3.9% versus 2.5% in June), and the continuation of robust premium rate increases, should position the company for a strong FY23 in our view (assuming a more normal year for catastrophe claims).

Changes to forecasts

We downgrade QBE FY22F EPS by 6% on higher claims costs than expected, but we lift FY23F EPS by 5% on higher investment yield assumptions.

Our target price is slightly reduced to (login to view).

Investment view

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

The stock remains relatively inexpensive trading on ~10x FY22F PE. ADD rating maintained.

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