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Blog

QBE Insurance Group: 1H19 results

Richard Coles

Key points

  • QBE Insurance Group's (QBE) FY18 cash NPAT (US$715m) was in-line with Bloomberg consensus and largely met management guidance.
  • The key result highlight, in our view, was the strong improvement in QBE's underwriting performance, which accelerated into year end.
  • We lift QBE FY19F/FY20F EPS by 5%-9%. 
  • Maintain Add recommendation. We see the QBE turn-around gaining further traction in FY19.

Results summary

QBE's FY18 cash NPAT (US$715m) was in-line with Bloomberg consensus. Versus FY18 guidance, QBE's adjusted combined operating ratio (COR - 95.7%) was well inside management's target range (95%-97%), although QBE's net investment yield (2.2%) was slightly below management's target level (2.25%-2.75%) due to 4Q18 market volatility.

FY19 guidance is for a further improvement in QBE's underwriting performance (COR target 94.5%-96.5%) with investment returns (3%-3.5%) also set to benefit from a lengthening of QBE's investment duration. Overall, a lack of obvious issues and evidence of clear progress, makes this QBE's best result for quite some time.

The good

  1. QBE's FY18 attritional claims ratio (ACR) (~50%) declined 3% on FY17 (53%), with ACR momentum increasing throughout the year (~49% in 2H18 vs ~51% in 1H18);
  2. ACR improvement was also broad-based, with all divisions seeing ACR improvements of 2%-5% on pcp in FY18;
  3. FY18 underlying GWP growth was a healthy 4% on pcp driven by 5% group-wide premium rate increases;
  4. Asia Pacific (AP) saw a much improved 2H18 performance (COR of 99.5% vs 109% in 1H18) with AP remediation work now largely complete;
  5. Even acknowledging a higher FY19 hazard allowance, QBE's FY19 COR guidance feels conservative given rate momentum and expected cost out benefits; and
  6. QBE's PCA capital ratio rose on lower risk charges from de-risking activities (1.78x vs 1.64x in FY17).

The not so good

  1. As mentioned, the FY18 net investment return (2.2%) was slightly below management's target range (2.25%-2.75%);
  2. Australia FY18 GWP actually fell 1% on a reported basis, impacted by currency movements and CTP pricing reforms;
  3. AP still saw a large underwriting loss for the full year (COR ~115%);
  4. Group gearing (D/E 38%) remains elevated (target range 25%-35%), although QBE have just announced a tender to repurchase debt; and
  5. North America saw a 2H18 reserve top up (1.7% of NEP ex Crop) while Europe reserve releases continue to rebase downwards.

The not so good

  1. As mentioned, the FY18 net investment return (2.2%) was slightly below management's target range (2.25%-2.75%);
  2. Australia FY18 GWP actually fell 1% on a reported basis, impacted by currency movements and CTP pricing reforms;
  3. AP still saw a large underwriting loss for the full year (COR ~115%);
  4. Group gearing (D/E 38%) remains elevated (target range 25%-35%), although QBE have just announced a tender to repurchase debt; and
  5. North America saw a 2H18 reserve top up (1.7% of NEP ex Crop) while Europe reserve releases continue to rebase downwards.

Changes to forecasts and investment view

We upgrade QBE's FY19F/FY20F EPS by 5%-9% on improved COR expectations and increased investment income assumptions. Our QBE PT rises (Morgans clients login to view). We see the QBE turn-around gaining further traction in FY19 and maintain our Add recommendation.

More information

Morgans clients can access our detailed report and revised share price target for QBE Insurance Group (QBE). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.