Reporting Season

Do the numbers live up to the hype for this well-backed segment of the market?

Thu 10 Aug 23, 3:43pm (AEST)
QBE - Primary
Source: Livewire Markets

Key Points

  • QBE's full year results were largely in line with expectations, with statutory NPAT of $400 million and gross written premiums of $12.8 billion
  • The stock fell as much as 4.1% in early trade but bouncing back towards breakeven on Thursday
  • Jason Kim from Tyndall Asset Management reiterated his buy rating on QBE, citing its attractive valuation and potential for earnings growth over the next two years

There has been plenty of support for this market cohort recently. Fund managers and broking houses have piled on, amid rising interest rates and growth in gross written premiums. 

I'm speaking, of course, of the insurers. 

Early last month, Macquarie put out a note saying there is potential upside risk to gross written premium (GWP) growth for a number of insurers, whilst UBS highlighted QBE - the stock in focus today - as its preferred general insurer. 

So, has reality lived up to the expectations? To answer that question, we spoke with Tyndall Asset Management's Jason Kim, who himself was bullish on QBE heading into the results. 

"The results, on an underlying basis, look good, so I think the key point is everything's on track, and the reasons to be in the stock are still there", says Jason Kim

QBE Insurance Full Year Key Results

  • Statutory NPAT $400M vs year-ago $48M

  • Gross written premiums (GWP) $12.80B - in line with expectations

  • Net premiums earned $7.98B 

  • Combined operating ratio (COR) - 98.8% 

  • Interim dividend 14 cents per share (10% franked); Record 18-Aug, payable 22-Sep

FY23 Outlook:

  • Constant currency GWP growth of ~10%

  • Combined operating ratio of ~94.5%

  • 1H23 exit running yield of 4.9%

QBE 1-year chart vs ASX 50. Source: Market Index

Key Company Data

2023-08-10 15 41 08-Window
Source: Market Index
Jason Kim, Tyndall Asset Management

Please note, this interview took place on Thursday, 10 August. Tyndall holds QBE in the Tyndall Australian Share Wholesale Fund

In one sentence, what was the key takeaway from this result?

The results, on an underlying basis, look good, so I think the key point is everything's on track, and the reasons to be in the stock are still there.

The stock was down sharply early but has bounced and is now down 1.2%. In your view, was it an overreaction, an under-reaction or appropriate?

Rating: Slight overreaction

This result was largely already flagged not that long ago when they updated the market. When QBE provided that update, the stock actually went up a little bit and the key thing was, although they had all these one-offs, it showed that on an underlying basis, things were still quite good. 

Were there any major surprises in this result that you think investors should be aware of?

The key surprise was QBE’s high tax rate. So if we strip out tax, everything was in line with what they said. 

Would you buy, hold or sell QBE on the back of these results?

Rating: BUY

There's no reason to change our view on it. So it's still a buy for us. It's trading on roughly 10 times earnings.

The market is at, say 15 times. QBE trades at a discount but five points is way too much, and we do expect earnings to improve over the next two years.

So we see a huge upside there.

What’s your outlook on the insurance sector? Are there any risks to this company and its sector that investors should be aware of?

Yes, there are a few.Unusual weather events: Do they keep on occurring more so than what is planned for? With global warming, you can't rule that out.Interest rates: Insurance companies sit on their premiums for quite a while, and they invest in fixed income and cash, and we've had this huge uplift in interest rates, and that's been very positive. So if interest rates were to decline, that would be a risk.

We are of the view that interest rates are now at a more normal level. We had a very unusual last several years.

Claims inflation: It's still lurking. We had two big events in New Zealand, the Auckland Storm and Cyclone Gabrielle. And then you had Storm Elliot last year in the US. When you have huge events in a region, it results in a lot of what you call event-driven claims inflation.It takes a long time to work through those claims, and they cost a hell of a lot. I think we need to see claims inflation moderate to more normal levels.

There is also one stock-specific issue with QBE: North America has been a problematic region for them for a very long period of time. We really would like that to settle down and improve. And if you look at it from an underlying basis, it looks like they're doing all the right things, but as we talked about, North America had its fair share of catastrophes over the last several months.

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX right now? Are you excited or are you cautious about the market in general?

Rating: 4

I'm a little bit cautious about the market in general. And the key reason is that given where interest rates are right now, the market should moderate - it's a relative thing. If you can get a better income out of your term deposits, or investing in fixed income securities, then the market should have adjusted downwards to reflect that, and it really hasn't.

I think the key driver is that a lot of investors are still anchored towards the very low interest rates they've been accustomed to for the last several years.

In many ways, they say, "Okay, interest rates are high, but they will go back down and therefore we'll value it based on the expectation that interest rates will drop." And that probably isn't going to happen. Interest rates will likely stay where they are and, on that basis, we have to be cautious.You've really got to go into the cheaper parts of the market because those expensive parts of the market are largely premised on interest rates dropping sometime in the near to medium term. 

Catch all of our August 2023 Reporting Season coverage The Livewire Team is working with our contributors to provide coverage of a selection of stocks this reporting season. You can access all of our reporting season content by clicking here.

Written By

Chris Conway

Managing Editor

Chris is the Managing Editor at Livewire Markets and Market Index. His passion is equity research, portfolio construction, and investment education. He is also very keen on the powerful processes that can help all investors identify great opportunities and outperform the market, and wants to bring them to life and share them with you.

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