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

QBE Insurance Group Limited is a Company with a strong market position that is engaged in underwriting general insurance and reinsurance risks and is undergoing transformation which will generate positive results in terms of significant savings, supply chain management and recovery initiatives. QBE developed a new senior cross-functional Climate Change Working Group which will include testing the impact on its strategy, improving its current governance around climate change, doing a more detailed analysis of its exposures to climate risk in various products and markets and identifying further opportunities to assist its customers. QBE’s first quarter underwriting performance is tracking to plan; and as a result, it remains on track to achieve its Combined Operating Ratio target for the full year 2018. The Group has come up with a new initiative of Premiums4Good that is a unique global initiative that enables a QBE customer to use a portion of their premium so that they can invest in securities with an additional social or environmental objective, such as social impact bonds, green bonds and investments in infrastructure projects with environmental benefits. It expects to continue to pay a dividend of up to 65 per cent of cash profits. Further, margin support in FY18 is centred around lower losses from Asia/Latin America and improvements in Australia and New Zealand. Divestments in non-core portfolios are also expected to help manage capital towards markets that can deliver better returns. Given this and the group that still trades at a discount to peers, the opportunity for investment looks decent.


COR Performance (Source: Company Reports)

Launch of Tender Offer for Senior Notes - The Group announced about its Fixed Rate Senior Notes due 2022 (“Notes”) to tender for purchase by QBE for cash (the “Tender Offer”) of up to U.S.$100 million. This tender Offer will be subject to few restrictions that were mentioned in its tender offer memorandum released on 13 June 2018 (the “Tender Offer Memorandum”). This Offer will not be made, directly or indirectly, into the United States. These kind of Notes (ISIN XS1589873097) will be issued outside Australia to wholesale investors, and any person who is willing to participate in this Tender Offer will have to obtain a copy of the Tender Offer Memorandum from QBE. Further QBE will also have to pay an accrued Interest in addition to the Purchase Price (mentioned in the Memorandum) in respect of the Notes accepted for purchase under the Tender Offer and the minimum Purchase Price and the Maximum Purchase Price will be U.S.$960 and U.S.$980, respectively per U.S.$1,000 principal number of Notes. The primary focus for this is to acquire up to U.S.$100 million of outstanding Notes.

Repositioning North America (Source: Company Reports)

Financial Performance - The Group recorded an adjusted combined operating ratio of 104.1 per cent for FY17 as compared with 93.7 per cent in 2016, which raised some concerns on its operations. The probability of adequacy of outstanding claims was strengthened to 90.0 per cent as compared to 89.5 per cent in FY16. In FY 17, the improved expense ratio was recorded at 15.7 per cent as compared to 16.5 per cent in FY16. The Group reported a statutory net loss after tax of $1,249 million as compared to a net profit after tax of $844 million in the prior year. Additionally, in FY 17, the net earned premium grew by 7 per cent due to reinsurance cost savings. The net investment return for the year 2017 was of 3.2 per cent (FY16: 2.9 per cent). In addition, QBE’s indicative APRA PCA multiple was of 1.64x (FY16: 1.76x). The company has declared the final dividend of four Australian cents per share, 30 per cent franked (FY16 - 33 Australian cents, 50 per cent franked). The Group reported a debt to equity ratio of 40.8 per cent for FY17 which fell outside its target gearing range of 25-30 per cent. In the first quarter of 2018, the group’s rate increased in line with forecasts, in terms of pricing environment. Premium rate strength of over 4% was noted for the first quarter, again led by Australia & New Zealand Operations, and positive rate movements in North America and Europe, while Asia Pacific is under a comprehensive plan of action. QBE expects improvements in Asia Pacific to be more skewed towards the second half of the year.


Trend of Attrition (Source: Company Reports)

Other Updates – Under its buy-back program, the Company had bought back 9,098,292 shares (in June 2018) with $87,449,427.08 as the total consideration that lately got increased as at June 18, 2018. Few of its Directors purchased the Company’s shares from the market like William Marston (Marty) Becker acquired 1192 shares for a consideration of $9.46 per share and Kathryn Lisson acquired 537 shares for a consideration of $9.46 per share.  The Group appointed Pat Regan as its new Group Chief Executive Officer. In the year prior to his appointment as Group Chief Executive Officer, Pat has led the strong turnaround in Australian & New Zealand Operations, and now same is going to happen as soon as an application of a similar approach to performance management across all of QBE’s operations takes shape. Moreover, the Group Executive Committee was refreshed.

Cell Review Process (Source: Company Reports)

Outlook- The Company was put to the test by a sequence of weather-related catastrophes, which included Hurricanes Harvey, Irma and Maria across the Americas; wildfires in California, and Tropical Cyclone Debbie in Australia and these events contributed to an estimated US$330 billion of global catastrophe losses but out of which US$135 billion was insured. While the Group’s European, Australian & New Zealand Operations delivered strong results but QBE’s overall performance in 2017 was unsatisfactory due to which a number of decisions have been taken by the Board and management in recent months.  QBE targets the combined operating ratio in the range of 95.0 per cent - 97.5 per cent in 2018 and investment return in the range of 2.5 per cent - 3.0 per cent.


FY18 Targets (Source: Company Reports)

Along with the changes in the management, the Group has launched a program called as “Brilliant Basics” which will improve the underwriting quality, pricing and claims in every market in which it operates and every product that it underwrites. The Board is working towards building a Company that is innovative, customer centred, agile and technology enabled. It is working on its cost savings program as well. Brilliant Basics will soon become the hallmark of QBE as this important program of work is mobilising so far and the Group expects that it will deliver benefits in the second half. Additionally, S&P Global Ratings has affirmed an A+ financial strength rating on QBE’s core operating companies earlier this year.

Stock Performance - The Company is making continuous efforts to achieve consistent excellence towards improvement in underwriting quality, pricing and claims especially it is focussing on repositioning its North America operations so that it delivers an improved underwriting performance and is remediating its Asia operations through improved pricing and risk selection. The sale transaction of Latin America operations to Zurich Insurance Group was a significant achievement. Though the first four months of the financial year were challenging for global investment markets due to various factors related to yields and equity market volatility which resulted in lower investment returns but these returns were offset by the benefit of higher risk-free rates that were used to discount liabilities. The stock price has been declining in the last one year and was down by 11 per cent in last six months but witnessed a slight recovery of 0.43 per cent in last five days. We give a “Buy” recommendation at the current market price of $9.430 as the management is confident about encouraging early progress towards the implementation of its strategy of “simplification” and is expanding on priorities for 2018.
 

QBE Daily Chart (Source: Thomson Reuters)

 
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