QBE Insurance’s Earnings Momentum Continues to Impress; Fair Value Estimate Increased

QBE Insurance QBE delivered a much stronger 2022 result than we expected. Cash profit was up 5% to USD 847 million, a material beat on our USD 560 million forecast. While premiums and claims were close to our expectations, operating and commission expenses and investment income losses were much lower.

The underwriting result, which is before investment income and other financing costs, more than doubled to USD 2.2 billion, underpinned by a 9% increase in premiums and falling expense and commission ratios. Commissions and expenses as a percentage of premiums both fell 90 basis points to 14.3% and 12.4%, respectively. Operating leverage, cost discipline, mix shift, and income associated with quota share reinsurance all contributed to the lower-than-expected costs.

Investment losses were USD 776 million, comprising mostly unrealized losses as higher interest rates result in lower bond prices. Given the higher cash rate environment, we expect QBE to generate stronger returns on its policyholder and shareholder funds in 2023. We assume QBE generates a return of around 4.5% on its USD 28 billion investment portfolio in fiscal 2023, equating to about 60% of pretax profit.

We make only minor changes to our premium growth and claim cost forecasts, but we are more positive on operating costs, which results in our midcycle combined operating ratio reducing 100 basis points to 96%. We increase our fair value estimate by 8% to AUD 13 per share, but the shares still appear expensive at an 11% premium to our valuation.

We are mindful that with higher investment income, elevated competition is likely, illustrating our no-moat rating for the insurer. We expect this to result in periods where claims grow faster than premiums, given that the insurers will be generating good returns on capital overall.

The final dividend of AUD 0.30 per share, 10% franked, takes full-year dividends to AUD 0.39, bettering our forecast by around 11%. We assume a similar 45%-50% payout ratio in 2023 and 2024.