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

Resilient stock performer in the insurance segment: QBE Insurance Group Ltd (ASX: QBE) is engaged in underwriting general insurance and reinsurance risks worldwide; and the company provides personal, commercial, and specialist general insurance. The company operates through segments like North American Operations, European Operations, Australian & New Zealand Operations, Latin American Operations, Asia Pacific Operations, and Equator Re. The group’s half year performance indicated a recovery in margins in 1H18 post the significant pressure that was seen over last few years. Given the improvement in fundamentals and support from macro factors, there is a likelihood of recovery in earnings with portfolio re-shaping and cost management alongside an uplift in premium rates and leverage to interest rate scenario. Given that the underlying 1H18 insurance margin has been close to the midpoint guidance on margins of about 7.3% for FY18, the group seems to be tracking well for the full year target. With favorable insurance cycle and capital management initiatives, the stock looks to be placed well. In fact, QBE has retained the commitment to $1 billion capital management for next three years. Overall, the stock is showing decent movements while QBE got least affected due to the Royal Commission on the back its highly diversified business that is spread across several countries. While many Insurance companies were impacted by the Royal Commission, QBE was still able to manage the challenging environment.

Royal Commission’s Inquiry: The Royal Commission, which is the powerful inquiry headed by former judge Kenneth Hayne, has raised questions on whether the current regulatory regime is adequate to minimize consumer detriment, and it is considering whether laws should be strengthened to protect consumers. The Royal Commission will accept comments from the public until October 25 before making a final recommendation to the government. More than A $41 billion (i.e., $29.78 billion) worth of insurance policies have been sold to consumers in 2017 by the life and general insurance industry, as per the Royal Commission’s inquiry. The insurers in Australia were excluded from laws, as they require fair contracts and are required from them to handle policy claims honestly and efficiently. The inquiry indicated for having arguments to justify the exclusions as some insurers relied on unfair terms and conditions (including outdated technical medical definitions) to avoid payouts. The hearings revealed that the general insurers breached self-imposed regulations on over 31,000 occasions without penalty in recent years, casting doubt on the industry's ability to regulate itself. Therefore, a question has been raised complying with financial services laws. On the other hand, the quasi-judicial inquiry can recommend regulatory reform and prosecutions and is due to table an interim report in coming days before issuing its final recommendations to the government in February 2019. While these challenges encircle the group, QBE still has a better position to withstand and maneuver through the challenges as seen in the past.


Income and Equity Indicators (Source: Company Reports and Thomson Reuters)

Decent First Half 2018 Financial Performance: For the first half of 2018, QBE has reported 4% rise in the statutory net profit after tax to $358M and cash profit after tax was up 3% to $385M. However, the adjusted net profit after tax declined by 18% to $380M due to a reduced level of positive prior accident year claims development and lower investment returns. In 1H 2018, the company has posted the statutory return on equity of 8.2% compared to 6.6% in 1H17. The average Group-wide premium rate rose 4.6% versus 1.0% in 1H 2017. The pricing conditions had improved in all divisions, especially in European, North American and Asia Pacific Operations. The premium rate momentum had accelerated in Australian & New Zealand Operations from an already strong level. Furthermore, North American Operations’ combined operating ratio had improved to 97.8% in the first half of 2018 from 98.2% in the prior period. European Operations of the company has recorded another strong result while the combined operating ratio of 94.5% was noted against 91.3% in the prior period on the back of a reduced level of positive prior accident year claims development; however, current accident year profitability improved with support from a 3.2% improvement in the attritional claims ratio. The premium rate of European Operations averaged 4.8% compared with a 1.1% reduction in the prior period. Australian & New Zealand Operations’ combined operating ratio was broadly stable at 92.3% in the first half 2018 due to a 1.4% improvement in the attritional claims ratio (1.9% excluding LMI). Asia Pacific Operations’ combined operating ratio had improved to 108.5% from 109.1% driven by the extent of remediation undertaken and the level of underlying improvement achieved during the half and this is better compared with the 2017 full year combined operating ratio of 115.5%.

Moreover, the company has delivered 1% increase in gross written premium to $7,887M. The company’s adjusted combined operating ratio is of 95.8% in 1H 2018 compared to 94.5% in 1H 2017, which is about the mid-point of the Group’s previously announced FY18 target of combined operating ratio expected to be in the range of 95.0%-97.5%. This is after adjustment for excess catastrophes and is supported by an improvement in the attritional claims ratio (excluding Crop and LMI) to 51.3% from 51.8% in the prior period. The Attritional claims ratio (excluding Crop and LMI) has improved to 51.3% from 51.8% in 1H 2017. In the 1H 2018, there was positive prior accident year claims development was at $51M compared to $147M in 1H 2017. The company’s adjusted commission and expense ratio was broadly stable at 31.2% versus 31.3% in 1H17. The company had annualised net investment return of 2.1% in 1H 2018 compared to 3.6% in 1H17. Additionally, during the first half of 2018, the company had reduced the debt to equity ratio to 36.9% compared to 40.8% at FY17. The company had strengthened Indicative APRA PCA multiple to 1.74x from 1.64x in FY 17. The company’s probability of adequacy of net outstanding claims was broadly stable at 90.2% (FY17 90.0%).


1H FY 18 Financial Performance (Source: Company Reports)

Simplification Initiatives undertaken by the Company during the first half of 2018: QBE has undertaken initiatives during the first half that contribute to the simplification agenda. These comprise the sale of the Latin American Operations (excluding Puerto Rico) to Zurich Insurance Group. Sale of Argentina and Brazil operations was completed subsequent to 30 June 2018 and the sale of operations in Ecuador, Colombia and Mexico is expected to complete by year end. In Asia Pacific, the company has sold the operations in Thailand and has entered into a reinsurance transaction to completely exit the Hong Kong construction workers’ compensation exposure. Further, the company has undertaken the sale of the Australian and New Zealand travel insurance business to nib. QBE has also commenced the process to exit North American Personal lines operations. The company has signed an agreement with Liberty Mutual for the sale of the renewal rights of the independent agents’ personal lines portfolio that includes gross written premium of around $230M. Overall, these simplification initiatives are expected to result in exiting of businesses and portfolios that had generated an underwriting loss of over $200M in 2017.

Capital Management: The company’s board had declared an interim 2018 dividend of 22 Australian cents per share, franked at 30%, which is in line with the 2017 interim dividend per share of 22 Australian cents per share, also franked at 30%. The total shareholder payout for the first half year of 2018 was A$397M (in view of share buyback), which is up 31% from A$302M in the prior period. The QBE shares had begun trading ex-dividend on 23 August 2018, the record date was 24 August 2018 and the dividend was paid to the shareholders on 5 October 2018. Moreover, QBE’s Board had remained committed to the three-year share buyback of up to A$1Bn comprising of no more than A$333M in any one calendar year. In  the first half of 2018, including share buyback, the total shareholder payout was up 31% to A$397M.


 
Shareholders’ Return (Source: Company Reports)

Outlook for FY 18: QBE Group had revised the full year 2018 combined operating ratio and investment return target ranges. They have been amended to exclude Latin American Operations held for sale at 30 June 2018. For FY 18, the company now expects the combined operating ratio to be in the range 95.0% - 97.0% and the Investment return to be in the range of 2.25% - 2.75%.

Stock Recommendation: Meanwhile, QBE stock has risen 18.92% in three months as on October 05, 2018. The group has a positive overview and got least affected due the Royal Commission on the back of its highly diversified business that is spread across several countries. The group was also seen to be well protected against calamities that included Hurricane as it had about $900 million of its aggregate reinsurance program for absorbing losses. The stock is trading at the level of $11.57, has support at $10.34 and has resistance over $12 with probability of a breakeven considering the drivers that stay intact. The earnings per share estimate of around mid-single digit rise through the trends of 1H 2018 can be seen with better margins playing a role while 2H18 expense ratio might be up with investments in staff etc. Opportunity from Asia regions might also help the group while US segment has already improved. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 11.57.
 

QBE Daily Chart (Source: Thomson Reuters)

 
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