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 Ltd (ASX: QBE) seems to be one insurer that has started moving in right direction lately post the major losses witnessed in 2017. With restructuring efforts and business simplification moves, and new reinsurance program with more focus on Insurance Linked Securities (ILS), QBE seems to be moving towards better fundamental scenario while a turnaround in financials is expected in long term.

Finalized Notes offer: QBE Insurance Group Ltd (ASX: QBE) finalized the Purchase Price of its Fixed Rate Senior Notes due 2022 of U.S.$977.50 per U.S.$1,000 principal amount of Notes wherein the principal amount of Notes is equal to over U.S.$100 million. The aggregate principal amount of Notes have been made at or below the Purchase Price, surpassing U.S $100 million, while the group accepted Offers made at the Purchase Price on a pro-rata basis subject to a Scaling Factor of 18.035%.

Capital Management: The group started buying back shares program in 2017. But given their performance in 2017, they could not raise the dividends in the second half of 2017 while cut the final dividend to four Australian cents per share. Overall, they reported a dividend of 22 cents per share reflecting a payout ratio of 61%, which is lower than the ratio flagged as per their dividend policy of up to 65% of cash profits. Despite this pressure, the group is on track with regards to the three-year share buyback program. The key thing is that the S&P Global Rating for the group has been A+ in terms of financial strength on the core operating companies.

Simplifying the business: The group holds a solid market position in Australia and Europe but intends to exit some of their underperforming operations. The group exited Latin America business (associated with an underwriting loss of $94 million in 2017) and this was done at a decent valuation. The Division was divested to Zurich for $409 million, representing an appealing premium to book value. On the other side, their North America Personal Lines with Gross Written Premium of approximately $350 million has been slated to lack a competitive edge in terms of generating a consistent underwriting profitability. This business also has a heavy operational complexity and cost. Therefore, the group is pursuing to exit this book of business in the next few months. Major opportunities in North America have been recognized for the purpose of acting as a better operating insurer that focusses on commercial underwriting. Personal Lines business has also been spotted for an exit to help yield benefits from rationalization of systems and back office. The key benefit will be to have better processes in North America with prudent cost savings. In Asia Pacific, profitability challenges in Hong Kong construction workers comp portfolio were taking a toll on the group. As a result, a Loss Portfolio Transfer Agreement was made with Swiss Re related to over $200 million of Hong Kong construction workers comp reserves. Thus, exposure to a very challenged portfolio that otherwise recorded a $53 million underwriting loss in 2017, has been reduced. The group also exit from their loss-making business in Thailand. Additional remediation activities across 18 portfolios including Marine in Hong Kong, Singapore and Indonesia and Accident & Health in Hong Kong and Singapore, have been key in Asia. They also exited whole segments like Indonesian Tugs & Barges where the industry risk profile was not acceptable. In Property, across the whole region, they are reducing the risk profile of the portfolio while reviewing their exposures in catastrophe exposed markets. In addition to remediation, the Brilliant Basics program of work has identified a number of opportunities for Asia to improve the sophistication of approach to risk selection, pricing and claims management, leveraging the practices of other Divisions. The group’s sale of Latin America, as well as the Asia Pacific transactions and the exit from North America Personal Lines would decrease their underwriting loss of over $200m exposure.


Repositioning in North America (Source: Company Reports)

Brilliant Basics strategy: The Brilliant Basics agenda is aimed at ensuring a consistent level of excellence in underwriting, pricing and claims everywhere – in every country and in every portfolio. The group’s implementation under this Brilliant Basics program led to major changes in the business in Australia & New Zealand including - establishing a Chief Underwriting Office and Product Committees for a better governance and oversight of underwriting and risk selection; detailed underwriting guidelines to enhance local underwriting risk selection; better sophistication and granularity of pricing models including greater use of third party data; expanding the resources and capabilities of the dedicated pricing team and; reducing claims leakage by amongst other things, fraud prevention, better supply chain management, greater use of data analytics and bringing the management of more complex risks back onshore. Under this program, they were able to turnaround the Division with the underwriting results of 50 cells recording an improvement of over an 18-month period while the underlying net combined operating ratio enhanced by over 4% (exc. LMI) over the same period.


Brilliant Basics’ impact on Australia and New Zealand (Source: Company Reports)

For performance improvement, the group is implementing the performance management process across QBE. Each cell owner identifies key risk factors and for those risk factors decisions are made on remediation actions. Decisions might comprise rate increases for specific segments, more selective underwriting, claims actions, or shifts in distribution.

Innovation and cost reductions: The group continues to focus on innovation as well as cost reductions. They formed QBE Ventures last year to offer them with the access to the innovation in the InsurTech space. QBE Ventures has finished its third investment into a New York based start-up called HyperScience. HyperScience is an artificial intelligence platform that captures and analyses information from documents and handwritten forms. The group intends to improve the efficiency of their operations, especially via the automation and digitization of their processes.  

Guidance: The group witnessed a premium rate strength of over +4% (excluding CTP) in the first quarter of 2018, driven by Australia & New Zealand Operations, as well as from the positive rate movements in North America and Europe. The group sees performance improvements in Asia Pacific to be reflected more towards the second half of the year. But with the challenging global investment markets due to a combination of rising yields as well as equity market volatility in the first four months they forecast their year to date investment returns (on an annualized basis) to be below their FY18 target range. However, the group was able to offset their falling investment returns by the benefit of higher risk-free rates used to discount liabilities. Moreover, their debt to equity ratio was also very high at 40.8% during 2017, as compared to their target gearing range of 25% - 35%. But they bought back $291m of senior debt in March, decreasing their gearing ratio to over 37%. The group aims at the gearing ratio to move towards their target range during the course of the year. As of 1^st May, 2018, the group has acquired $A23.5m of shares on market under the program.
 

2018 Key Targets (Source: Company Reports)

Stock performance: The shares of QBE fell over 18.4% in the last twelve months (as of July 20, 2018) on the back of underperformance in 2017 results and impact from claims under natural calamities. On the other hand, the group is reshaping its business for a stronger and simpler QBE. This comprises giving priority to its “Brilliant Basics” which is aimed for a better underwriting quality, pricing and claims handling in every market in they operate and underwrite. The group is also repositioning in North America for a better underwriting performance as well as remediating Asia via a better pricing and risk selection. The group already sold Latin America business to Zurich Insurance Group, as a part of their strategic review. They also disposed a couple of legacy reserve portfolios from their North American and Asia Pacific divisions with an objective of a better predictability of future result which enables their efforts and focus is brought to be on the future. The group has been making a decent progress since the last twelve months with regards to their Brilliant Basics program. The group generated major savings from their claims transformation program via anti-fraud, supply chain management and recoveries initiatives. The group’s efforts to revamp growth have been showing some early signs of improvements. We believe investors can leverage the subdued levels of this dividend yield stock, as an entry opportunity. We give a “Buy” recommendation at the current price of $ 9.87.
 

QBE Daily Chart (Source: Thomson Reuters)

 
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