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

Pricing Remained Favorable in 2018: QBE Insurance Group Ltd (ASX: QBE) deals in underwriting general insurance and reinsurance risks across the globe; and is a provider of personal, commercial, and specialist general insurance and also manages Lloyd’s syndicates, with other investment management services. Post a tough 2017 year, the global pricing environment has remained favorable lately; and this combined with the company’s approach to pricing in the cell reviews, led the company achieve a Q3 YTD premium rate increase of 5.0%, up from 4.6% at the half year. In the third quarter of 2018, the average premium rate increase has been 5.9%. Moreover, while the market conditions were a little more supportive, the company believes in the forensic approach to portfolio analysis and increasingly sophisticated assessment of premium rate adequacy by class of business has contributed to above market-average premium rate rise.For FY 18, in the Australian business, the company has achieved increase in rates of 17.7% for commercial property, 14.2% for Aviation, and 10% in strata. For the European operations, the company has achieved rate increase of 10.6% in international property, or 8.9% for Financial lines and 18.6% in the Reinsurance casualty portfolio. In North America, the company has achieved 10.1% in reinsurance A&H, and 8.6% in the accident and health portfolio in terms of rise in rate. For the recovery in Asia Pacific, the rate trends have continued to improve further with now a slight positive overall. The level of premium rate increases being achieved means that retention levels have continued to hold up. These results are directly attributable to the granular and forensic drive for premium rate increases.

Investment performance improved in 3Q18: In the third quarter, the markets were volatile as marked with rising yields. The USD duration was extended through the third quarter, with asset duration extended to 1.8 years during Q3 (and around 1.9 years now) from 1.6 years at 30 June. The growth asset allocation has expanded to 12% and 3Q YTD annualised returns are of approximately 12%. FUM is stable post the 1H18 capital actions. FY18 return is towards top of 2.25%-2.75% (including risk-free rate liability benefit). QBE is now looking to finalise the 2019 plan. The fixed income running yield increased to 2.2% at Q3. This, coupled with additional term premium generated by duration extension and a modestly increased exposure to growth/risk assets, bodes well for higher returns in 2019.


2018 Performance (Source: Company Reports)

Underwriting Trends: At the end of the third quarter, QBE is well positioned to deliver against the combined operating ratio target range of 95%-97%. Most importantly, the company’s attritional claims ratio improved as it continues to edge lower. On large risk and CAT claims, it is seen that a number of international insurers recently reported profit warnings from either large individual risk claims and/or CAT activity. The large risk claim frequency continued to trend down, and catastrophe claims YTD are comfortably within allowances. All of this is due to portfolio simplification, and the company continues to reduce the hazard index for the property portfolio and has further reduced catastrophe aggregate exposure in non-peak zones such as Fiji.

Improving investment yield: Due to QBE’s short asset duration, the company is uniquely positioned to benefit from rising interest rates. While global investment markets were volatile in the second half of the year and especially in October, it is seen that risk-free rates continue their upward trajectory, led by US Treasuries. Although higher risk-free rates adversely impact the current year investment return, this is completely offset by the benefit of higher risk-free rates to discount liabilities. Further, higher yields bode well for comfortably higher returns in FY19 and beyond.

Balance sheet strengthening: The company’s PCA (Prescribed Capital Amount) multiple is stable towards the upper end of the target range and the reserving PoA (probability of adequacy) is also expected to be stable at 90%. Moreover, the company’s 2018 buyback commitment of A$333M is complete.

Simplification agenda progressing well: Through 2018, QBE has made a lot of decisions to exit or sell underperforming and overly complex businesses. The company managed to do this at a premium to book value. Meanwhile, the sale agreement for the remainder of the North American personal lines operations is now imminent and is expected to be announced very shortly. QBE is also progressing with Puerto Rico sale. Combined with the other transactions the company did, this simplification program of work is now largely complete, and the company is looking to build and selectively grow going forward. Additionally, Effective 1 January 2019, QBE’s operations will comprise International, that will include European Operations and Asia. Richard Pryce, who is currently the CEO European Operations, will now become CEO International and a new senior leader for Asia will be appointed, who will report directly to Richard. Australia Pacific is planned to include Australia, New Zealand, the Pacific and India. Vivek Bhatia, currently CEO Australian & New Zealand Operations, will become CEO Australia Pacific. North America is expected to continue as is, led by CEO North America, Russ Johnston. These changes and resulting simplification are expected to contribute to the Group’s efficiency agenda with much of the administration.

2019 reinsurance placement is progressing as per plan: The 2019 reinsurance placement is absolutely progressing as per the plan and comprises of a significantly lower peak zone catastrophe retention, being the US and Australia. An even greater reduction in non-peak zone catastrophe retention, has significantly increased vertical catastrophe limit and a traditional catastrophe aggregate treaty protecting against multiple medium sized CATs, as well as significantly lower per risk retention. Overall, the company expects to be better protected against catastrophes but will retain more on the frequency of the large individual risk claims.

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 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 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) improved to 51.3% from 51.8% in 1H 2017. In the 1H 2018, there was positive prior accident year claims development 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.


1H FY 18 Financial Performance (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%. Including the beneficial impact of higher risk-free rates used to discount claims liabilities, the company expects the investment return is likely to be towards the end of the target range.

Targets for 2018 (Source: Company Reports)

Stock Recommendation: Meanwhile, QBE stock has risen 1.98% in three months as on November 30, 2018. The company’s stock is trading at A$11.55 and has an immediate support at $10.50 and resistance around $11.80 level. QBE expects the investment return for FY 18 likely to be towards the end of the target range. The momentum in premium rate through to FY19E can support margins despite the reinsurance placement slated for 2019. Given the potential move in earnings per share, the 12-24 months’ stock price upside is expected to be in single digits (%). Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 11.55, up 2% on December 03, 2018.
 

QBE Daily Chart (Source: Thomson Reuters)

 
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