QBE, the big insurance company, was out on Friday.

Brokers liked the result, in that price targets went up.

But it did seem to be a modest miss to street expectations, and perhaps most importantly, the outlook commentary seemed to suggest things were as good as they were going to get. We’ll come back to that outlook in a moment.

Overall, fundamentals are looking very good. Gross written premiums continue to grow, the underwriting result (combined operating ratio) was strong in the 94-95% range, the balance sheet improved, and the investment returns from higher rates continues to support improved earnings and dividends.

There were concerns that GWP growth is moderating, and management commentary was constructive but not especially bullish here, citing a moderate view on the rate (meaning insurance rates) cycle. The key comment is mid-single digit growth.

And, from the quarterly premium data below, is definitely a material slowdown from the average of the past 6 quarters and more.

The combined operating ratio for the US remains disappointing, which, given stronger US peer results is somewhat problematic. Why can’t QBE do better in the US, is the question.

Now management pointed to the exit of several lines of business, where QBE is suffering COR’s of ~130% (material negative underwriting losses), and that should help correct some of the issues in North America.

Business is like that; you try to grow into markets that profitable, where you have an edge, an ability to participate or increase share, and, to shrink from those where either the industry structure means you can’t make money, or your offering just doesn’t stack up relative to peers by a sufficient margin.

And that’s what QBE seem to be doing.

Exiting some of those lines of business is part of the answer for why premium growth of mid-single digits is the guidance, alongside the general moderation in prices given issues of affordability for end clients, and it is also part of the answer for why the US COR improvement will occur.

But overall, it’s still a case of “given the strongest insurance markets in decades, shouldn’t you do better”. And here management’s response seems illustrative.

“We’ve been missing guidance, and for once we’d like to achieve it” is our translation of the below.

That would appear to be quite conservative.

And so that makes for a somewhat asymmetric payoff, in our mind. Either QBE is doing a bit worse than peers (hence lower revenue growth than market, and worse underwriting outcomes than market) but that overall the results are still good enough to be a meaningful improvement/driver for earnings overall, or, they are lowballing guidance and setting an easy hurdle that they fully expect to meet.

That’s probably a favourable bet to make, in our view, and hence we remain happy with our positioning.

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