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 engaged in underwriting general insurance and reinsurance risks, and investment management. The Company's segments include North American Operations, which write general insurance and reinsurance business in the United States of America; European Operations, which write general insurance business across Europe; Australia and New Zealand Operations, which primarily underwrite general insurance risks throughout Australia and New Zealand. As an Insurance Company, QBE is uniquely placed to help the people in their times of need and its community initiatives reflect this role. QBE Australia has been Principal Partner of the Sydney Swans for 31 years. In 2017, the Group became the supporter of the Academy’s new Youth Girls program which provides the talent pathways for the young female footballers. It is always experimenting with technology to improve its catastrophe claims response process. Its focus is to purely simplify the Group by a realistic plan which will help in achieving an acceptable return. While 2017 was a year full of challenges, 2018 seems to be giving some better kick-start with management changes made for reshaping the company, improving trends seen in international segments, healthy capital position, and catastrophes at bay, at the moment.

Key changes in management and simplification of group structure: The Group announced few senior management changes. Inder Singh was appointed as the Group’s Chief Financial Officer of the Company and replaced Michael Ford, while Peter Grewal was appointed as Group’s Chief Risk Officer. These appointments will help the Company to deliver its priorities in 2018 and beyond. Recently, QBE offloaded its Latin American operations for a consideration of $409 million to Zurich Insurance Group and this helped the Group to focus on its objective of reducing the risk.
 

North American Operations (Source: Company Reports)
 
Challenges of 2017: QBE’s underwriting result was impacted by a material decline in the performance of the Group’s emerging markets businesses, while the Group reported a net loss after tax for the year ended 31 December 2017 of $1,249 million compared with a net profit of $844 million last year, and this included significant non-cash items as the Company impaired North American goodwill ($700 million) and responded to the reduction in the US corporate tax rate ($230 million) by writing down the value of the deferred tax asset in its North American Operation. The net cost of catastrophes for QBE (after reinsurance) was recorded at $1,227 million in 2017 as compared to $439 million in 2016. The Group’s adjusted combined operating ratio was 104.1 per cent in FY17 as compared to 93.7 per cent in FY16 and this increase was driven by an increase in catastrophe experience and due to a significantly reduced level of positive prior accident year claims development. The group’s Lenders’ Mortgage Insurance (LMI) generated a lower portion of underlying insurance profit in FY17 as compared to FY16. However, LMI seems to be now becoming less significant, given the base-line of higher loss ratio reduction in Net Earned Premium.
 

An overview of Financial Performance (Source: Company Reports)
 
The Group’s dividend policy is designed to ensure that it rewards its shareholders relative to cash profits and maintains sufficient capital for future investment and growth of the business. The Board declared a final dividend of 4 Australian cents per share for 2017, franked at 30%, as compared to 2016’s final dividend of 33 Australian cents per share, franked at 50%. This reduction in dividend reflects the very significant impact of catastrophe claims that contributed to a $632 million after-tax loss on a cash basis during the second half of the year and the dividend will be paid on 20 April 2018. The group’s Lenders’ Mortgage Insurance (LMI) generated a lower portion of underlying insurance profit in FY17 as compared to FY16 for the Australian & New Zealand Operations. However, LMI seems to be now becoming less significant, given the base-line of higher loss ratio reduction in Net Earned Premium. Further, the North American Operations’ Loss Portfolio Transfer coupled with a $116 million second half claims reserve strengthening, pave the path for improved profitability and reduced earnings volatility in 2018. Various positive developments in Europe also indicate for the change in the extended soft pricing cycle as seen up till now.
 

Investment Performance (Source: Company Reports)
 
Efforts on emerging technology and innovative methods: QBE Ventures was launched in 2017 to invest globally in start-ups that provide access to differentiated technology which has the potential to enhance QBE’s business model that drives efficiencies and develops new avenues of growth. In 2017, QBE Ventures invested in its first two portfolio companies, Cytora and RiskGenius. One of the things that QBE Ventures looks for when investing in a start-up is the potential to bring their product or technology back into QBE through the creation of commercial partnerships along with its equity investment. The QBE Digital Innovation Lab continues to help create a future that will be driven by the recent emerging technologies. There was a research undertaken for the emerging technologies and this had a far-reaching impact on the organization such as it came out with the development of the new insurance products and with few better services for the appreciation of the risks and opportunities crowned by cutting-edge technologies. QBE is also said to explore the Blockchain Insurance Industry Initiative (B3i) to gauge the potential of using Distributed Ledger Technologies within the insurance industry for the benefit of all stakeholders.  
 

Profit Improvement Program’s Overview (Source: Company Reports)
 
Outlook: The Group has started working on reshaping the company’s strategies so that it can create a stronger and simpler QBE. It is continuously working on prioritization of “Brilliant Basics” which include improving underwriting quality and pricing and claims handling in every market in which the Company operates. The Management has designed a program to simplify and improve the Company’s performance and to reduce the volatility. QBE has areas of real expertise and strength and the objective now is to deliver excellence across the Group consistently. Investing in technology and accelerating the pace of innovation will play a substantial role in all elements of the revised strategy. Managing the likely impact of climate change is also an area of focus and QBE supports the recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD). It is targeting to achieve an investment return between a range of 2.5 per cent to 3.0 per cent. In its 2017 Annual Report, QBE confirmed that it has formed a “cross-functional Climate Change Working Group” and that it has reviewed its readiness to disclose in line with the TCFD recommendations. The Board will focus on few listed priorities in 2018 which are aligned with its following objectives:
 

1. Simplifying QBE: Reduce complexity across the business and focus on markets and products that are more profitable and have a distinct advantage.

2. Working on Basics: Underwriting, pricing, and claims form the basics of the business of the Company and QBE continues to focus on doing each of these efficiently.

3. Delivering on 2018 plan: It will drive rigorous performance management through detailed cell reviews. It focuses to deliver a combined operating ratio within its target range (95.0 per cent- 97.5 per cent) and will work to improve the attritional claims ratio through better risk selection and through pricing and claims outcomes.

4. Repositioning North American Operations: It is working hard towards its North American Operations to deliver improved underwriting results at a similar level to its European and Australian & New Zealand Operations, and it is looking forward to some significant opportunities to further transform and refocus this business.

5. Building for the future: It is in the process of building QBE a successful company for the future and for this it needs to be innovative and customer focussed whilst delivering a clear technology roadmap.
 

Stock Performance: The Company reported 3.2 per cent of the Net Investment return for the year for FY17 as against 16.5 per cent in FY16. QBE’s financial strength rating by S&P Global Rating was affirmed (A+) and the outlook was revised from positive to stable by looking at QBE’s core operating companies. This reflected that QBE’s underlying earnings are expected to rebound in 2018 and in 2019 at the back of improving expense base and through the benefits which the Group will incur from further remediation of its North American, Asia Pacific and other operations. The Group is also focusing on reducing the complexity of the business so that it operates only in the markets and products where it has a distinct advantage and can grow profitability. QBE aims to increase the Prescribed Capital Amount (PCA) multiple within benchmark PCA range of 1.6–1.8x, while returning gearing back to benchmark debt to equity range of 25–35% through a combination of retained earnings growth and other capital management initiatives. The Company had announced buy-back of shares and till now the Company has bought back 11,16,908 shares under the three-year cumulative on-market share buyback facility of up to A$1 billion. QBE also launched an invitation to its holders of the Notes (fixed rate senior notes due 2023) to offer to tender their Notes (U.S. $300,000,000) for acquisition and these Notes were issued by QBE for cash under its U.S. $4,000,000,000 medium term Note Program. Till date, QBE has accepted the purchase of an aggregate principal amount of Notes which was equal to U.S. $291 million. Meanwhile, the share price was down by 7.39 per cent in the past three months but showed some recovery sign and climbed up by 2.95 per cent in last five days (as at April 13, 2018). We give a “Buy” recommendation on this stock at the current market price of $ 9.740
 

QBE Daily Chart (Source: Thomson Reuters)

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