Financial Services

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

By Market Index
Thu 05 May 22, 12:35pm (AEDT)

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%.


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%.


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.

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