Dragged down by higher tax-rate

1H23 RESULT

Need To Know

• Cash earnings miss $US405m vs $US450m consensus, on higher tax rate.  Profit Before Tax inline with consensus.
• Lower dividend AUD 14cps vs consensus AUD 16cps (35% payout vs 50% expected).
• Outlook unchanged from July FY23. Guidance maintained +10% GWP growth, COR 94.5% - which ultimately is key for the share price.

Investment Implications

Despite pre-announcing the 1H23 result in late July, QBE has found another way to disappoint on numbers. A much higher tax rate is the culprit, 30% vs 21% expected by the market. The dividend of AUD 14cps missed expectations in this result.

Dividend caution is a function of 1) higher tax, 2) natural 2H skew (including important crop insurance/hurricane season); 3) challenging 1H23 underwriting performance.

Importantly, FY23 guidance remains unchanged from the July update. Gross Written Premium (GWP) growth of 10% and Combined Operating Ratio (COR) of 94.5%. Ultimately this is the most important aspect of today’s results, and would equate to a mid-teens ROE.

Result Details

1H COR 97.6% vs market 95.9% (higher CAT costs), implies larger 2H skew is needed to meet FY23 at 94.5%

Stripping out Catastrophe (CATs) claims the ex-CAT claims ratio improved from 61.6% to 60.6%. Better results in North America/International help, offset by Australia Pacific where premium growth did not keep up with claims inflation.

CAT claims 8.7% 1H23 vs 6.2% 2H22 given by natural disasters in the period from cyclone Gabrielle and NZ flooding. CAT costs $US699m vs QBE's initial allowance of $US535m.

Capital position looks strong 1.8x APRA’s Prescribed Capital Amount (PCA) the upper end of the QBE comfort range of 1.6-1.8x

Investment View

QBE’s investment case is anchored on two key attributes; 1) a strong environment for premium growth; and 2) QBE's ability to drive higher are more consistent return profile. Both aspects were on display in this result.

Frustratingly, QBE's ability to kick an own goal is not entirely removed. The higher tax rate and the lower dividend will frustrate investors today.

In our view, this should not be the lasting message from the 1H23 results. Higher premium rate growth environment, further portfolio optimisation and the potential for falling claims cost as goods inflation slow coupled with a strong balance sheet. Lower CAT costs in 2H23 would also be helpful. 

QBE share price is up ~20% YTD relative to S&P/ASX200 yet trades on NTM PER of 10x. In our view, the share can re-rate further on improved execution (and some better luck on the run of bad weather globally!). Retain the Buy rating .