Company Overview: QBE Insurance Group Limited is engaged in underwriting general insurance and reinsurance risks, management of Lloyd's syndicates and investment management. The Company's segments include North American Operations, which writes general insurance and reinsurance business in the United States of America; European Operations, which writes general insurance business, both general insurance and reinsurance business through Lloyd's of London; Australian & New Zealand Operations, which primarily underwrites general insurance risks throughout Australia and New Zealand, providing all lines of insurance for personal and commercial risks; Emerging Markets, which writes general insurance business in North, Central and South America, and provides personal, commercial and specialist general insurance covers throughout the Asia Pacific region; Equator Re, which provides reinsurance protection to related entities, and Corporate & Other.


QBE Details

While QBE Insurance Group has faced numerous challenges in the last one year, the management has been lately trying to improve the group’s performance. Particularly, 2017 has been a tough year with impact from various catastrophes. The group is undertaking a detailed review of some of its businesses and it may plan for a disinvestment, if required. Businesses under this radar may include LMI, Australian Personal lines, Argentina, LatAm (excluding Argentina), and Asia (excluding HK and Singapore), and any such divestment move might deliver value. QBE’s undervalued position thus offers a leeway for the management to refocus on the business. Central to this will be the new CEO’s “brilliant basics” program on which more light will be shed during the upcoming result.

FY17 has been a challenging year: Given the adverse trading environment, the Group now expects to report FY 17 combined operating ratio (COR) of around 104%, which is above the target COR range of 100-102% (level >100% indicates for an unprofitable underwriting business). Further, non-cash items have contributed to an expected FY 17 after tax loss of around $1.2bn with US$130m of net costs. Around $230 million was written down from its deferred tax assets in North America Operations which was due to the reduction in the US corporate tax rate to 21%. FY 17 net investment return is estimated to be around 3.2% or $800m. The Group’s FY 17 combined commission and expense ratio is expected to be around 32.5%. It has increased the Group’s reserving probability of adequacy (PoA) to 90% for FY 17 from 89.5% in prior year. QBE will release its FY17 financial result on February 26, 2018 and will announce details on the dividend for full year.
 

Divisional CORs (Source: Company Reports)
 
Last year, QBE had stated that 2017 was a costlier year in the history of the global insurance industry. QBE’s business was impacted by the Hurricanes that impacted the Gulf of Mexico, the Caribbean and Florida, and Mexico was also hit by earthquakes. Due to the uncertainty of the estimated cost of Harvey, Irma, Maria and the Mexican earthquakes, the Group had increased its 2017 allowance for large individual risk and catastrophe claims to $1.7bn in October 2017, and also included allowances for its large individual risk and catastrophe claims in the fourth quarter of 2017. Therefore, the impact on its pre-tax earnings was then indicated to be $600m.

Improved Outlook for 2018: The outlook for 2018 includes a target COR range of 95.0-97.5% (better than expected figure for FY17) and a target net investment return of 2.5-3%. The lower FY18 investment yield guidance might require QBE to have a spread of 50 bp to 110 bp over its weighted average two-year yield. On the other hand, it is planning to make a strategy for reviewing its Latin American Operations to simplify the Group and reduce the risk. Recently, S&P revised its rating for QBE and changed it to a “stable” outlook from “positive”, which still indicates that QBE’s underlying operations will rebound in 2018 and 2019 and will reflect lower attritional claims and improved expense base. This reflects the continued strength of the group’s balance sheet. It is noteworthy that QBE is well placed to benefit from price rises from its reinsurance programs which were purchased in 2018.

Recent Updates: QBE recently appointed Vivek Bhatia as the Chief Executive Officer of Australia and New Zealand Operations (ANZO). It also completed its redemption of USD 2.40% senior notes due on 1 May 2018. It also settled the shareholder action proceedings which were commenced by Money Max Int Pty Ltd in the Federal Court of Australia on behalf of a group of shareholders who acquired an interest in QBE. QBE agreed to pay A$132.5 million in full and final settlement that included interest and the Applicant’s cost. This settlement was without any admission of liability by QBE but subject to Court approval.

APRA Statutory Reporting: APRA’s move to have quarterly reporting by the insurers will lead QBE to have separate reporting of the results of QBE’s two domestically licensed general insurers, QBE Insurance (Australia) Limited (QIA) and QBE Lenders’ Mortgage Insurance Limited (LMI) which together account for a relatively small proportion of QBE Insurance Group Limited global revenues. QBE reports to the ASX in US dollars while APRA statutory reporting is in Australian dollars. Certain fee-based businesses are not undertaken by QBE’s licensed Australian general insurers and are therefore not captured by APRA’s quarterly statutory reporting but are included within the ASX reported results for QBE’s Australian & New Zealand Operations.
 

Debt Performance (Source: Company Reports)
 
First half 2017 Results: The Board declared an interim 2017 dividend of 22 Australian cents per share, franked at 30% which represented a 5% increase over 2016 interim dividend per share of 21 Australian cents per share. QBE’s statutory 2017 interim cash profit after tax was $374 million which was up by 30% as compared to prior year which reflected an improvement in the combined operating ratio which was 97.5% against 99.0% in the prior year. Its North American Operations delivered a further improvement in underwriting profitability which recorded a combined operating ratio of 98.2% which was 100.5% in prior year. Despite challenging market conditions, its European Operations witnessed a solid underwriting result. North America returned to top-line growth after an extended period of remediation; and its non-core assets sales, its gross written premium was up by 7% on an underlying basis as compared to prior year. It also included a sixth consecutive half of positive prior accident year which claimed $107 million for its development which is albeit lower than $196 million in prior year.
 

GWP, Claims and Expenses (Source: Company Reports)
 
Total assets and cash flow position: As on 31 December 2016, QBE’s Total Assets were $35,078 million and whereas on 30 June 2017 it was $37,718 million. Its borrowings broadly were unchanged, and debt to equity was 32.8% and whereas in 2016 it was 16.33%. As far as its cash position is concerned, the closing head office cash balance for first half of 2017 was $989 million and whereas it was $794 million for the first half of 2016. It is targeting an internal cash flow of greater than $1 billion in 2017. For Equator Re, Gross Written Premium (GWP) was up by 22% which was driven by a proportional increase in its business, which was underwritten to its divisions. Its Net claims ratio deteriorated to 68.7%. There was an increase in commission ratio due to the growth in its proportional business which incurs higher commissions relative to the excess of loss in the portfolio. Despite the premium rate increase, the policy retention remained broadly stable.

Stock Performance: Given that most of the shortcomings have been factored in the stock price now, QBE seems to be in an attractive zone. Factors such as interest rates and insurance pricing are expected to be bringing QBE to a favourable position, along with the positive trends in international insurance markets, buyback scenario, S&P’s stable outlook, and better bond yields for the medium-term. Further, conservative yet achievable FY18 guidance reflecting better quality and improved QBE portfolio scenario, with greater underwriting discipline, can be paid an attention to. Given the recent headwinds, the share price slipped by 9.5% in the past six months while the group edged up in past one month (as at February 02, 2018). Looking at the entire picture, we give a “Buy” on the stock at the current price of $10.71
 

QBE Daily Chart (Source: Thomson Reuters)

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