The QBE result was quite a miss, relative to consensus estimates (underlying NPAT $805m, vs consensus at $850m).
The forward guidance on dividends was also lower than the market anticipated, and both of these issues overshadowed what we thought was nonetheless a good result.
Firstly, the key metrics.
Claims ratios continue to trend favourably, with the attritional claims ratio seeing sequential improvement.
Expense ratios continued to be well managed.
The net impact is that the all important combined operating ratio is comfortably under 100, and thus QBE’s result was amongst the best it’s had in years.
The years of poor returns (lower investment income, higher claims ratios, industry competition) eventually paved the way for a stronger pricing cycle, to improve overall industry profitability.
That pricing cycle (referred to as an insurance “hardening” cycle) is evident in the segmental revenues shown below.
But perhaps even more so when viewed via growth rates.
And the aforementioned ratio improvement equated to a strong underwriting profit, again, the best in years.
Investment income is usually added to the underwriting profits, to give a sense of the overall insurance margin. And investment income has been virtually non-existent, given the pandemic impact on yields.
That’s why QBE has some of the best leverage to rising rates in the market.
However, there is a caveat, in that if inflation, specifically resulting in claims inflation, rises, but bond yields don’t rise by as much, QBE can face a squeeze, that requires an even firmer pricing response (which then takes longer to recoup margins).
This is what appears to be playing out at present (we can all see US inflation at 7.5%, versus 10 year bond yields at 2%). Now it is extremely unlikely that inflation stays at 7.5%, with yields staying so low, over the longer run.
Either yields go up, or inflation goes down, or some combination thereof. So we don’t see this as an especially negative risk to QBE.
Hence, we prefer to focus on the good operational outcomes, the improved underwriting profits, and the prospect of higher investment income down the track.
QBE continues to provide us with good US dollar exposure (hedge against a falling AUD), and likewise the positive beta to higher rates.
The higher claims inflation, and the higher industry uncertainty associated with COVID have caused QBE to be more cautious on the dividend. Whilst this is disappointing from a yield perspective, we are not really in QBE for the current yield.
Overall, we remain (fairly) happy holders.
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