QBE Insurance Group Limited (QBE)
BUY

Keep the faith

 11 May 2023
Sector: Financials

1Q23 TRADING UPDATE

Need To Know

  • FY23 insurance premium growth upgraded to 10%, vs 7% market 
  • Claim costs upgraded on higher-than-expected weather-related claims, much relates to prior periods
  • Medium term EPS improvement remains intact. 

The good: Gross Written Premium (GWP) growth has been upgraded from ‘mid to high single’ digit to ~10% for FY23. This reflects the strong pricing environment that we have seen in both US and EU peers over 1Q. Encouragingly, the upgraded premium guidance implies a reacceleration of premium growth vs 2H22. Property and reinsurance categories leading the way.

The bad: higher claims costs – predominantly higher large weather-related costs - have forced an upward revision in the Core Operating Ratio (COR) from 93.5% to 94.5%. The market currently has a 93.7% COR estimate for FY23.

Some of these higher claims are due to weather events from FY22, with QBE strengthening reserves by $130m. QBE’s underlying operating performance looks stable in 1Q23.

In our view, weather-related claims incidence costs should see downward pressure given more neutral weather conditions (no longer La Nina in Australia) and the structural shift in QBE’s portfolio away from providing insurance in areas close to the equator

Earnings revisions: stronger revenue growth is not likely to be enough to offset higher claim costs in the 1H. Mid-single-digit downgrades are likely. For FY23, earnings revisions could be close to flat. Medium-term – FY24 should see small upgrades given stronger for longer premium growth.  

At some point – weather-related claims should normalise. Combined with the benefits of QBE’s restructuring efforts over the last few years, the true operating capability should be on display.

Investment View

Keep the faith. Rising global premiums are likely to stay strong through 2023 providing opportunities for both revenue growth and margin expansion for QBE. Positive leverage to rising interest rates should continue to help QBE’s earnings. We see the prospect for a period of improved earnings over 2023/24.

There remains a clear opportunity for QBE to lift its core margins from ~6% to ~10%, which is in line with global peers. 

QBE is trading at a discount to both the global insurance peers, and the Australian peers of IAG and SUN. We rate QBE a Buy.

Figure 1: GWP premium growth has re-accelerated in 1Q to 10%

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Stock Overview

Share Price

Company Overview

QBE is an Australia-based insurance and reinsurance company. QBE underwrites general insurance and reinsurance risks and manages Lloyd's syndicates. By revenue, QBE is one of the Top 20 global insurers/reinsurers.

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