Australia | May 15 2023
This story features QBE INSURANCE GROUP LIMITED. For more info SHARE ANALYSIS: QBE
Despite an initial negative share market reaction to first quarter results, brokers maintain a positive outlook for QBE Insurance.
-Brokers remain upbeat on QBE Insurance following first quarter results
-Management raised gross written premium growth guidance
-Upgrade to the combined operating ratio acceptable, according to Citi
-Rising cash rates are delivering better returns
By Mark Woodruff
Despite a negative share price reaction to a first quarter performance update by QBE Insurance ((QBE)) at its AGM, brokers in the FNArena database remain upbeat as pricing and growth are ahead of prior trends and management guidance.
While the update for the global commercial insurer suggests to Morgan Stanley consensus estimates for FY23 may have to be lowered, FY24 forecasts should rise on better-than-expected revenue.
Global premium rate rises for the company reaccelerated to 10% in the first quarter of the year, supporting 14% (constant currency) gross written premium (GWP) growth, as renewal rates averaged 10% following a rebound in property and higher rate increases for the reinsurance division, QBE Re.
Rising cash rates are also delivering better returns on the insurers US$29bn investment pool. Investment income of US$384m for the quarter suggests Ord Minnett’s full year forecast of around $US1.3bn will be met.
Given around 90% of the portfolio is in fixed income, the broker is reassured by management’s assessment of no fallout from recent banking turmoil in the US and Europe.
QBE has an increasing exposure to Crop in North America which has better profitability and return on equity (ROE), observes Goldman Sachs.
Crop net earned premium (NEP) is expected to rise to US$1.4bn in FY23 from US$1.3bn in FY22, according to management, which suggests to Citi around 75% of the increase in GWP is being reinsured.
While commodity prices have fallen since the level of pricing determined in the premium, QBE remains comfortable that the fall is insufficient to trigger claims, especially given the likely associated increase in crop yields.
Overall, FY23 GWP growth guidance was increased to around 10% on the previous corresponding period, up from mid-to-high single digit growth.
In all geographic areas, rate rises were higher in the first quarter by comparison to the first quarter of 2022, with Australia (11.3%) leading the way.
As inflation trends are unchanged, Jarden suggests higher premiums will drive an improved outlook for the combined operating ratio (COR). The 10% premium rates rise in the first quarter compares to 7.1% in the fourth quarter of FY22 and 7.9% in the previous corresponding period.
Morgans also sees a clear pathway for improved profitability over the next few years, despite being disappointed by management’s increased FY23 guidance for the COR to 94.5% from 93.5%.
COR guidance was increased due to higher catastrophe (CAT) claims and a prior year reserve top-up.
The higher combined operating ratio guidance
In agreement with Morgans, Citi also considers the increased COR guidance is a short-term negative.
Unfortunately, QBE was hoping to build a period of consistent results (with lower volatility), with the aim of improving the company’s market rating.
While higher current year CAT claims are considered largely beyond QBE’s control, management acknowledged the quantum of prior year adverse claims development (US$130m) was unacceptable and practices around estimating year-end event costs will be reviewed.
The company will improve on its processes for estimating loss, like for the winter storm Eliot in December last year, which resulted in an adverse development of US$80m in the first quarter.
Focusing on the positives, Citi suggests the downgrade to COR guidance was acceptable given peer results. Moreover, underlying returns appear to be stable and there is modest investment yield improvement.
Ord Minnett’s outlying view
Lighten-rated Ord Minnett remains the outlier on both rating and target price ($13) in the FNArena database.
The average target of six brokers in the database is $16.13, which suggests around 10.4% upside to the current share price. This average target price fell from $16.28 prior to the first quarter results.
Apart from Ord Minnett, all brokers have a Buy (or equivalent) rating.
Outside of the database, both Jarden and Goldman Sachs also have Buy ratings with targets of $19.25 and $17.45, respectively.
Prior to first quarter results, Ord Minnett held the view differentiation was difficult for QBE, despite a focus on commercial and specialised insurance lines. Competition is also considered intense which prevents the consistent generation of robust returns on equity.
Following the results, the broker still considers the company is overvalued, even as industry margins strengthen, due to price increases and better investment income.
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