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), engaged in underwriting general insurance and reinsurance risks, management of Lloyd’s syndicates and investment management, has given a positive turn to its embattling operations at the recent Annual General Meeting. The group primarily provided insights on its portfolio remediation plan with efforts on buy-back tracking well. The stock now seems to be trading at a discount against its peers while many factors seem to be positioning the group in place with the much needed portfolio exits including the sale of the LATAM business and remediation of Marine and A&H in Singapore & Hong Kong.


Business Simplification (Source: Company Reports)

Shareholder Returns and Capital Management: QBE Insurance Group Ltd (ASX: QBE) expects to continue to pay a dividend of up to 65% of cash profits. Moreover, in March, QBE bought back $291m of senior debt, thereby reducing the gearing ratio to approximately 37%.In 2017, QBE had reported debt to equity ratio of 40.8%, outside of the target gearing range of 25% - 35%. The company expects the gearing ratio will move towards the target range during the course of the year. As a result, QBE has commenced the previously announced share buyback for 2018 and as at 1 May have acquired $A23.5m of shares on market under the program. Overall, the company committed to 3 year share buyback of up to A$1 billion.

Refining of portfolio through disinvestments: The sale of the operations in Latin America to Zurich Insurance Group, announced in late February, is a significant achievement for the company. For a business that delivered an underwriting loss of $94m last year, the sale of the Division to Zurich for $409m is an attractive premium to book value. The company had entered into agreements with Zurich Insurance Group (Zurich) for the sale of its operations in Argentina, Brazil, Colombia, Ecuador and Mexico. QBE Puerto Rico was retained by QBE to facilitate the servicing of claims that resulted from Hurricane Maria and will become part of QBE’s North American Operations. The company’s profit on sale before tax of these operations was projected to be around $100M. The sale is expected to be positively impacting the Group’s APRA PCA multiple and S&P capital position due to the profit on sale, lower risk charges and the disposal of approximately $42M of goodwill and intangible assets. However, the transactions are subject to regulatory approvals in each jurisdiction and are expected to close by the end of 2018. Moreover, QBE has also disposed of a couple of legacy reserve portfolios in the North American and Asia Pacific divisions to enhance the predictability of future result and allow the efforts and focus to be on the future compared to the past. North America Personal Lines business, that has GWP of approximately $350m, also carried a high amount of operational complexity and cost. The exit from this line of business will also enable the group to deliver cost reductions. QBE is taking steps to exit this book of business over the next few months. In Asia Pacific, QBE has entered into a Loss Portfolio Transfer Agreement with Swiss Re in relation to over $200m of Hong Kong construction workers comp reserves. This transaction is expected to completely remove the exposure to a very challenged portfolio that recorded a $53m underwriting loss in 2017. QBE has also recently sold the loss-making business in Thailand.

FY 17 Financial Performance: QBE has reported for 2017, a statutory net loss after tax of $1,249 million, compared to a net profit after tax of $844 million in the prior year. The FY 17 result was affected due to non-cash items that included a US$700 million impairment of North American goodwill and a US$230 million write down of the deferred tax asset in the North American Operations due to the reduction in the US corporate tax rate. Further, in FY 17, the group’s adjusted combined operating ratio was of 104.1% compared with 93.7% in the 2016. The increase is primarily due to extreme catastrophe experience and a significantly reduced level of positive prior accident year claims development. These factors more than offset an improved combined commission and expense ratio. The company’s North American Operations’ performance was heavily impacted by second half catastrophes including Hurricanes Harvey, Irma and Maria and the Californian wildfires, which resulted in a combined operating ratio of 109.1% up from 98.5% in the prior year. Additonally, in FY 17, the net earned premium grew 7% due to reinsurance cost savings. The company has posted positive prior accident year claims development of $37M compared to $366M in FY16. QBE had successfully reinsured potentially volatile claims liabilities in North American Operations. The probability of adequacy of outstanding claims was strengthened to 90.0% compared to 89.5% in FY16. In FY 17, the improved expense ratio was of 15.7% compared to 16.5% in FY16. The net investment return for the year 2017 was of 3.2% (FY16: 2.9%). In addition, QBE’s indicative APRA PCA multiple was of 1.64x (FY16: 1.76x). The cash remittances from operating divisions were broadly stable at $1,022M (FY16: $1,106M). The company has declared the final dividend of four Australian cents per share, 30% franked (FY16 - 33 Australian cents, 50% franked) given the latest performance.


FY 17 Financial Performance (Source: Company Reports)

Key Personnel Changes: Pat Regan was appointed as the new Group Chief Executive Officer from 1^st January 2018 following a four month leadership transition. Further, the Group Executive Committee has been refreshed. The company has introduced three new members of the Group Executive. First is David McMillan, who had joined QBE as Group Chief Operations Officer in September. Secondly, Vivek Bhatia had joined QBE in February and was appointed to replace Pat Regan as Chief Executive Officer of Australian & New Zealand Operations. Thirdly, Inder Singh got promoted to the role of Group Chief Financial Officer. The company has also appointed Peter Grewal as the Chief Risk Officer and will be joining the company in Sydney in July.

Improved Outlook: QBE targets the combined operating ratio in the range of 95.0% - 97.5% in 2018 and investment return in the range of 2.5% - 3.0%. In the first quarter of 2018, QBE ‘s performance has been broadly in line with the forecasts and what the company experienced at the end of 2017. QBE experienced premium rate strength of approximately +4% (excluding CTP) in the first quarter, again due to Australia & New Zealand Operations, but also with positive rate movements in North America and Europe. Overall, QBE’s first quarter underwriting performance is tracking as per plan. The year to date investment returns (on an annualised basis) were below the FY18 target range. This is due to the fact that the first four months were challenging for global investment markets due to a combination of rising yields and equity market volatility. However, the lower investment returns have been offset by the benefit of higher risk free rates used to discount liabilities. Moreover, QBE’s strategic focus includes prioritisation of a program called “Brilliant Basics”, which includes improving underwriting quality, pricing and claims handling in every market in which the company operate and every product that QBE underwrite. The company is targeting to achieve consistent excellence in these disciplines across the global operations. Two areas that the company is putting particular attention are repositioning North America to deliver improved underwriting performance and remediating Asia through improved pricing and risk selection. Additionally, QBE intends to simplify its structure and to reduce the complexity across the business and operates only in markets and products where the company is profitable and has a distinct advantage. The company has planned to deliver the 2018 objectives and drive rigorous performance management through detailed cell reviews. Overall, the company expects the combined operating ratio within the target range and to improve the attritional claims ratio through better risk selection, pricing and claims outcomes.
 

Repositioning North America (Source: Company Reports)

Stock Recommendation: As per March 2018 Quarterly Rebalance of the S&P/ASX Indices, QBE was removed from S&P/ASX 20 Index, effective from March 19, 2018. Meanwhile, QBE stock has risen 5.98% in one month as on May 18, 2018. QBE is expected to benefit from US corporate tax cuts, improvements in industry pricing, the divestment of the troublesome Latin American businesses, and the possibility of rising interest rates. Overall, the sale of Latin America, the Asia Pacific transactions and the exit from North America Personal Lines will remove from the company, the exposure to businesses that had contributed an underwriting loss of over $200m to the 2017 result. QBE is undergoing transformation and will be able to generate significant savings from the claims transformation program through anti-fraud, supply chain management and recoveries initiatives. Additionally, S&P Global Ratings has affirmed an A+ financial strength rating on QBE’s core operating companies earlier this year. Therefore, based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 10.390.
 

QBE Daily Chart (Source: Thomson Reuters)

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