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 worldwide, is a provider of personal, commercial, and specialist general insurance and also manages Lloyd’s syndicates, as well as offers investment management services. 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 recent strategic moves on FY19 reinsurance cost savings position the group to be witnessing improved EPS with a lot of focus on quality parameters. Improvement in premium rate with de-risking steps can help the group sail through past and prevailing challenges of the investment market. Group’s pre-tax ROE for interim period as at June 2018 has been up against the negative figure of 12.8% noted in previous six months. The following six months from June 2018 are expected to show further improvement. The group is putting efforts to recover in terms of the financial performance against the performance in last couple of years.


Financial Performance (Source: Company Reports and Thomson Reuters)

Completed the portfolio simplification agenda: QBE has now streamlined its business structuring by completing the portfolio simplification agenda and selling off its insurance operations in Puerto Rico, Indonesia and the Philippines. Moreover, effective from 1st January 2019, QBE will operate through major segments, International, that will comprise of European Operations and Asia. For this Richard Pryce, who was CEO European Operations, has now become the CEO of International segment and the company had planned to appoint a new senior leader for Asia who will report directly to Richard. The other segment that the company is operating is Australia Pacific, which is now comprising of  Australia, New Zealand, the Pacific and India. Vivek Bhatia, who was the CEO Australian & New Zealand Operations, has now become the CEO of Australia Pacific. The company is also operating though North America, and this segment is led by CEO North America, Russ Johnston. QBE has done these changes to simplify its whole group’s structure so that the group will have more of the administration and governance of the former standalone Asia Pacific operations. This segment was previously operated by the International and the Australia Pacific divisions. After this structuring, the CEO of Asia Pacific Operations, Jason Brown has taken a new role and has been appointed as the Group Chief Underwriting Officer.

Structured & finalized the 2019 reinsurance program: QBE in order to drive its group performance has recently finalised 2019 reinsurance program, which is meant to better operate the group’s simplified portfolio and to improve the underwriting risk profile. In the former structure of 2018, the locked-in cost of Cat and large risk was of $1.2BN (QBE retention) and the major exposure was to the single reinsurer. Cat retention was of $600M and Risk retention was of $100M. Now the Group’s 2019 reinsurance program which is fully placed, showcases that 50% of core catastrophe, risk and quota share covers have been placed for two years, which is subject to getting the final confirmation. The 2019 structure has reduced the peak ($400M) & non-peak ($100M) retentions. The company has increased the Cat limit by $1.1 billion. The company has reduced the retention by $200M and there will be further reduction to $100M in the case of the second event. There is an additional cover, which will reduce the retention to $100M for non-peak perils. The company has developed an aggregate cover for the protection against frequency of medium sized events. Equator Re 50% quota share is expected to further reduce the catastrophe retention. The will be significant reduction in the case of anticipated maximum loss. Moreover, the 2019 Reinsurance program is projected to significantly reduce the catastrophe exposure, which will further reduce the probable maximum loss (PML). The company’s 1:20 and 1:200 year probable maximum loss (PML) for Australian cyclone events is expected to decline by approximately 20% and 35% respectively, and the 1:20 and 1:200 year PML for North American hurricane is projected to decline by about 20% and 25% respectively. As a result, the new structure is expected to deliver a modest increase in both the S&P and APRA capital ratios. There is a decline in PML due to an additional Cat limit and lower Cat retention, Wrap and Equator Re quota share, Portfolio simplification and approximately $100M APRA PCA benefit (due to North America 1/200 year OEP reduction). Additionally, larger risks will get reduced after reduction in retention to $50M. The retention will decline further to $25M after three $50M claims. Equator Re 50% quota share is expected to further reduce the exposure to large risks.

Overall, 2019 reinsurance program is structured to significantly reduce the company’s catastrophe retention, will significantly increase the protection against catastrophe severity and frequency of medium-sized catastrophes. There will be a significant reduction of large individual risk claim retention, improvement in the protection against large individual risk claim severity and the increase in quota share protection is expected to further reduce claims volatility. Therefore, QBE’s 2019 reinsurance program is structured to balance appropriately the cost, protection of balance sheet, strength of capital and volatility of earnings. Furthermore, the company projects that the 2019 Reinsurance program will be able to save approximately $125M of reinsurance costs. However, this will be more than offset on the back of rise in the budgeted allowance meant for the large individual risk and the rise in catastrophe claims to about $1.4 bn, which will increase from about current $1.2 bn driven by greater variability of reinsurance recoveries. Meanwhile, there could be fluctuation of around $50M-$100M, but the company continues to be confident that QBE will be able to achieve an improved combined operating ratio and will be able to post higher overall profitability in 2019 versus 2018. This will be achieved on the back of an increase in the premium rate, anticipated  improvement in the company’s attritional claims ratio and also due to the recently started efficiency program.
 
 

2019 program provides greater balance sheet protection (Source: Company Reports)
 
Commenced a three-year (2019-2021) operational efficiency program: After QBE has consolidated (simplified) the regional coverage into three divisions, which comprised of North America, International Markets and Australia Pacific, the company has started a three-year operational efficiency program. As per this program, QBE plans to streamline the operations to make the same more effective, consolidate the company’s technology tools, reduce the costs related with IT and re-engineer and automate the overall processes. As per the Group’s 2019-2021 operational efficiency program, the company plans to save gross costs of more than $200M by 2021 before considering the underlying inflation and further investment into the Brilliant Basics program, the company’s technology and its digitization. The company plans to reduce the expenses by approximately $130M by 2021 from about $1.8BN to reduced presently. QBE is targeting to achieve an expense ratio of about 14% by 2021, which reflects an increase of around 1.5%, that will comprise of very decent and selective growth in the premium. QBE has plans to incur restructuring costs of approximately $95M over 2019-2020. Moreover, as per the three-year operational efficiency program, the company plans to also invest in the employees and the method of  working in order to ensure that the company is able to operate more efficiently. The company plans to invest in technology initiatives, that include the consolidation of underwriting platforms in North America and also in a more advanced workflow tool for the company’s European underwriters. These technology investments are expected to collectively support the company’s Brilliant Basics agenda, which will result in better pricing, risk selection and claims management. These investments are expected to reduce numerous legacy applications, which will result overall in the reduction of the IT run costs.


Targeting expense ratio <14% by 2021 (Source: Company Reports)

Stock Recommendation: Meanwhile, QBE stock has risen 5.42% in one month as on January 11, 2019. The company’s stock is trading at A$10.55 and has an immediate support at $9.75 and resistance at $11.56 level. The company has completed its portfolio simplification agenda of the group. Further, QBE has planned its 2019 reinsurance program. QBE is expected to benefit from the above strategic moves and its three-year operational efficiency program, which is meant to result in the net cost savings of $130M and an expense ratio of approximately 14% in 2021. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 10.55, ahead of full year results due in February 2019.
 

QBE Daily Chart (Source: Thomson Reuters)
 

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