QBE Insurance Group Limited

*Cash Profit ROE

QBE Details
Adverse Weather Conditions Expected to Affect Company’s Earnings:QBE Insurance Group Limited (ASX: QBE) is involved in underwriting general insurance and reinsurance risks, management of Lloyd’s syndicates and investment management. On December 24, 2019, the company informed the market about the buy-back of 23,888,479 shares at $295,064,159.4.

On December 18, 2019, the company notified that its North American Crop insurance business is expected to report an operating ratio of around 107% - 109% on net earned premium of nearly $1.2Bn because of prevented planting claims, and yield shortfalls as a result of recent adverse weather conditions. The company expects Group’s combined operating ratio to be slightly above the top end of its 2019 target range of 94.5% - 96.5%, despite expected improvement in the Group’s 2019 attritional claims ratio and favourable catastrophe experience during the half year. It further remains on track to report a net investment return towards the upper end of its 2019 target range of 3.0% to 3.5%. Moreover, acceleration in the pricing momentum along with the ongoing margin improvement underpinned by cell reviews, the Brilliant Basics program and operational efficiency drive, the company expects 2020 combined operating ratio in the range of 93.5% to 95.5%. With expectation of lower global risk-free rates, the company expects reduction in 2020 net investment return target range of 2.5% - 3.0% as compared to 3.0% - 3.5% in 2019.

The company will publish its financial report for the year ended 31 December 2019, on February 17, 2020. Other Key financial dates for 2020 are mentioned below:


FY20 Key Financial Dates (Source: Company Reports)

H1FY19 Key Highlights for the period ended June 30, 2019:Statutory net profit after tax improved from $358 Mn in H1FY18 to $463 Mn in H1FY19. Cash profit after tax for the period improved from $385 Mn in H1FY18 to $520 Mn in H1FY19. Cash profit RoE improved from 9.6% in H1FY18 to 13.4% in H1FY19. Average Group-wide premium rate increased from 4.6% in H1FY18 to 4.7% in H1FY19. Gross written premium was reported at $7,637 Mn in H1FY19 as compared to $7,887 Mn in H1FY18. Net earned premium for the period was reported at $5,671 Mn, as compared to $5,837 Mn in H1FY19. Adjusted combined operating ratio improved from 95.8% in H1FY18 to 95.2% in H1FY19. Attritional claims ratio (excluding Crop and LMI) reduced from 51.3% in H1FY18 to 47.7% in H1FY19, mainly due to significant improvement across all divisions. Commission and expense ratio reduced from 31.2% in H1FY18 to 30.9% in H1FY19. Net investment return increased appreciably from 2.1% in H1FY18 to 6.8% in H1FY19, reflecting particularly strong returns across most asset classes. Company expects combined operating ratio for FY19 in the range of 94.5% - 96.5%. Net investment return is expected to be in the range of 3.0% - 3.5%.

The Board of Directors declared Interim dividend (franked at 60%) of AUD 25cps for the period as compared to AUD22cps (franked at 30%) in H1FY18.

 

H1FY19 Key Metrics (Source: Company Reports)

Valuation Methodology:Price to Cash Flow Multiple Approach

Price to Cash Flow Multiple Approach (Source: Thomson Reuters), *1 USD = 1.44 AUD

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation:QBE’s share generated a positive six months return of 9.36%. The company faced a tough challenge due toadverse weather conditions, which led to slightly elevated attritional loss experience in some of its North American property classes. Considering the company’s business model, challenges in 1HFY19 and current trading levels, we have valued the stock using a relative valuation method, i.e., Price to Cash Flow multiple approach and we have considered peers like Insurance Australia Group Ltd (ASX: IAG), Suncorp Group Ltd (ASX: SUN), Medibank Private Ltd (ASX: MPL) and NIB Holdings Ltd (ASX: NHF), and arrived at a downside of lower single-digit in % terms. Hence, we recommend a “Sell” rating on the stock at the current market price of $12.960, up 0.856% on January 3, 2020. 
 
 
QBE Daily Technical Chart (Source: Thomson Reuters)

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