Financial Services

QBE to take US$75m hit on Ukraine: FY22 review pending

Thu 05 May 22, 12:35pm (AEST)
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Key Points

  • 1Q gross written premium remained strong in first quarter, up 19% on the previous period
  • 1Q total investment return run rate of around 2%
  • Morgans believes QBE could be in the buy zone due to premium increases, its positive cost-cutting outlook, and an attractive valuation

QBE Insurance Group (ASX: QBE) was up 3.3% at the open after today’s performance update revealed gross written premium remained strong in first quarter (1Q), up 19% on the previous period.

Highlights within what was a turbulent 1Q operating environment included:

  • Group-wide renewal rate increases averaged 7.9%, while growth ex-rate of 18% was substantial.

  • Crop gross written premium estimated to be circa $3.3bn in FY22, a significant increase from $2.7bn in FY21.

  • An external quota share has been placed on the 2022 underwriting year to manage net retention, and Crop net earned premium is expected to be around $1.3-1.4bn in FY22 from $1.2bn in FY21.

Catastrophe experience

While natural catastrophe remained higher in 1Q22 - including widespread flooding and storms across the east coast of Australia and Storm Eunice in the UK and Europe - claims for the quarter were in-line with the 1Q22 allowance.

QBE currently expects to have some [catastrophe cost] exposure to the broader Russia/Ukraine war, with potential net impact currently estimated at around $75m.

Meantime, QBE's recently entered transaction to reinsure legacy North American Excess and Surplus (E&S) lines prior accident year liabilities, is expected to reduce the group’s exposure to further reserve volatility in this run-off portfolio - and is currently expected to adversely impact QBE’s FY22 underwriting result by around $50m.

Investment portfolio

Over the quarter, QBE repositioned its investment portfolio with risk assets representing 9% of total investment assets at 31 March 2022.

This resulted in a negative asset risk free rate impact of $459m, which was broadly offset by a beneficial claims liability discount impact of $440m.

Due to higher risk-free rates and slightly wider credit spreads, the 1Q22 exit fixed income running yield of 1.52% increased materially on the FY21 exit running yield of 0.68%.

Management notes the 1Q22 exit running yield of 1.52%, together with QBE’s expected risk asset return of 5.5%, equates to a 1Q22 exit total investment return run rate of around 2%.

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FY22 review to follow

Commenting on 1Q22 performance, QBE Group CEO Andrew Horton said:

“Despite a number of natural catastrophes and significant geopolitical events, positive momentum experienced through FY21 continued into 1Q22, and I was pleased with QBE’s resilience through what was a turbulent operating environment.”

"We have had a strong start to the year for gross written premium growth and will review FY22 outlook at the half-year result following the key mid-year renewal period.”

As discussed at the recent 2021 result, management’s strategy centres around resilience and consistency, which should result in the business being capable of delivering a consistent low to mid-90s combined ratio.

Based on the current outlook for FY22, the group continues to expect a combined operating ratio that demonstrates improvement on the FY21 exit combined operating ratio of 94%.

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QBE's share price has had a volatile ride over the last six months.

What brokers think

Based on the brokers that cover QBE (as reported on by FN Arena), the stock is trading with 16.1% upside to the target price of $14.53.

Consensus on QBE is Strong Buy.

Based on Morningstar’s fair value of $12.52, the stock appears to be fairly valued.

Credit Suisse maintains an Outperform rating on the stock and has the highest of the brokers' price targets at $15.55, up from $14.45 as the forecast for fixed income yield in outer years is increased to incorporate rises in risk-free rates since the December quarter.

While Morgans' price target is at lower end ($13.50), the broker believes the FY21 miss was largely driven by one-off factors for claims and reserves.

The broker believes QBE could be in the buy zone due to premium increases, its positive cost-cutting outlook, and attractive valuation.

Citi also expects QBE to benefit from rising interest rates and the opportunity to optimise asset allocation and retains a Buy rating, with the target price falling to $13.70 from $14.55.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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