QBE

Winning awards

Usually, with a company, all your trying to do is work out if earnings are “better or worse than expected”.

But the inputs to that easy-to-say-hard-to-do idea are the analytical legwork that’s required.

With QBE, we note the winning of awards: e.g. “Green insurer of the year” for the fourth year running. You (as the investor) want to invest in “Quality companies with Good Growth prospects”, as part of a dedicated factor premia tilt.

Hence, companies that are receiving industry accolades are usually a good thing for evidencing that quality.

Anyway, back to the “better than expected” stuff.

Combined operating ratios

Despite putting out a result that mildly disappointed the market, particularly relative to implied FY guidance, management seemed to highlight that things are tracking well. Here’s the prepared, introductory result. That’s good to hear.

The combined operating ratio (COR) was 97.6%. Ex-catastrophic claims, the underlying COR was in the low-mid 90s, which is a stronger result. Those cat claims were, well, catastrophic, as the below helps describe.

Now, the easy rebuttal is “cat claims are a part of doing business, and that cost has gone up by frequency and magnitude in a world of climate change, and so you shouldn’t look at normalised numbers”.

That is a very valid point. Gross written premiums are going up by 10% per annum because of this global repricing of risk. They may not have gotten it precisely right, but they are headed in the right direction.

So, it’s not like it is uncompensated risk.

However, the overall result of a high actual COR of 97.6% does have bearing on “will they hit guidance” as discussed below.

Guidance

Guidance for the full-year COR remains at 94.5%, which means the 2H is expected to be very strong at 92%.

The problem here is that does require a material enough step up in the 2H. Siddarth below covers off this uplift. It is expected, but would still be a bit unusual, as an uplift.

Inder, above, doesn’t push back on this hurdle, but sticks to the good momentum in the business from rate and volume growth, and inflation moderating, and, to a lesser degree, the underlying business ex-cat claims that is doing well enough.

So that’s really the big one. Either Siddharth’s concerns are valid, or Inder’s answers are correct. And that’s what the market was worried about, regarding guidance.

Investment income

Just as with SUN, out earlier last week, the investment income is a huge part of the story. Running yields at ~5% are very, very attractive in the current environment.

Productivity

Turning to longer-dated productivity initiatives, my old colleague Simon, below, from AMP Capital days touched on the role that AI can play in helping streamline the underwriting process. The response from management is what we expect, namely excitement. It’s worth reading.

We’ve long thought that finance, e.g. insurance and banking, and perhaps after that, legal, are the areas most amenable to AI, and QBE’s commentary here is encouraging from a longer run perspective.

Summary

So, overall, the result summarised.

Strong GWP growth, acceptable ex-cat COR’s, very strong investment income driving robust ROE’s. Retention rates remain close to 90%, so higher pricing, and higher volumes, are not leading to higher churn rates.

The balance sheet remains strong, and with QBE trading at 10x forward earnings, we think we are compensated for this required uplift in earnings as regards the outlook.

The longer-run earnings outlook seems very strong, given these broader rate and volume drivers, including additional lines of business (e.g. cyber) or opportunities for cost out (AI).

All those analyst PT’s above basically amount to “well, if we take it at face value (mgmt answers/commentary) which seemed/sounded plausible, it should be fine, but, hurdles are hurdles. However, it’s on 10x so how bad does it have to be”.

With that balance in mind, we are sufficiently comfortable.

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