QBE Insurance Group: Good momentum heading into FY23
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 20 February 2023, 7:30 AM
- Sectors Covered:
- Insurance, Diversified Financials
- QBE Insurance Group’s (ASX:QBE) FY22 result NPAT (US$770m) was an 18% beat versus consensus, with the 2H22 dividend (A30cps) 11% above consensus.
- Overall, in our view, this was a very strong FY22 performance versus market expectations. Heading into FY23, the key tailwinds are premium rate increases and higher investment income which remain supportive of earnings growth, as highlighted by QBE expecting a mid-teens ROE versus 10.5% in FY22.
- We upgrade FY23F/FY24F/25F EPS by 1%-8% mainly on improved top-line growth assumptions. Our PT is lifted to (login to view).
- We see QBE as having strong operating momentum and it remains relatively inexpensive (~10x FY23 PE). ADD maintained.
QBE’s FY22 result NPAT (US$770m) was an 18% beat versus consensus (Visible Alpha), with the 2H22 dividend (A30cps) 11% above consensus. GWP of US$20bn was marginally softer than consensus (US$20.1bn)
FY23 guidance is for mid-to-high single digit GWP growth (constant currency basis), a combined operating ratio (COR) of 93.5% (FY22 94.2%) and a significantly improved investment running yield with the FY22 exit level at 4.1%.
QBE has entered into a reinsurance transaction to de-risk the groups exposure to reserves totalling US$1.9bn (~10% of total). This deal will cost US$100m up-front.
Overall, in our view, this was a very strong FY22 performance versus market expectations. Heading into FY23, the key tailwinds are premium rate increases and higher investment income which remain supportive of earnings growth, as highlighted by QBE expecting a mid-teens ROE versus 10.5% in FY22.
- GWP grew at a robust +13% on the pcp (constant currency basis), with growth being broad-based, e.g. North America (NA), International and Australia Pacific (AP) all +9%-+16% on the pcp.
- The FY23 adjusted COR (93.7%) improved on the pcp (95%) reflecting strong premium rate increases, reduced acquisition costs and lower adverse prior year claims development (APYCD).
- The group expense ratio (12.4%) declined on the pcp (13.3%) on cost discipline and leverage.
- AP and NA COR’s (~90% and ~99%) improved ~1%-4% on the pcp respectively.
- The reinsurance transaction will reduce volatility, with QBE noting the reinsured book had seen US$0.6bn of APYCD over the last 5 years.
- The expected mid-teens FY23 ROE (FY22 10.5%) points to a strongly improving returns profile.
- The balance sheet is healthy, with the PCA ratio at 1.79x (target range of 1.6x-1.8x) and debt-to-total capital at ~24% (target range of 15%-30%)
The not so good
- The group ex-cat claims ratio (58.2%) increased +0.8% on the pcp (+0.2% ex crop insurance) reflecting heightened inflation, higher event frequency and more non-catastrophe weather claims.
- QBE saw APYCD of -US$141m in FY23 (- U$192m in FY22) on some strengthening of inflation assumptions and an adverse UK business interruption judgement.
- FY22 net catastrophe claims of US$1.06bn were ~US$100m above allowances.
- The International COR (92.5%) was up on the pcp (90.6%) impacted by higher catastrophe claims and some APYCD.
- The NA COR of ~99% is still high and above target (<95%); and 6) GWP growth in property classes will slow as QBE prioritises mix/profitability in this segment.
Changes to forecast
We upgrade FY23F/FY24F/25F EPS by 1%-8% mainly on improved top-line growth assumptions. Our PT is lifted to (login to view).
With strong rate increases still flowing through QBE’s insurance book, investment yields improving and costs being well controlled, we expect QBE’s earnings profile to improve strongly over the next few years.
We also think the company remains relatively inexpensive trading on ~10x FY23F PE. ADD maintained.
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