QBE to Shrink US Business to Boost Long-Term Performance: Is It a Buying Moment?
$QBE Insurance Group Ltd (QBE.AU)$, Australia's largest insurer, announced its decision to withdraw from $US500m of North American middle-market business in a market update on Wednesday. The move includes the termination of up to 150 staff and is aimed at refocusing on "those businesses which hold more meaningful market position, relevance, and scale". The news caused QBE shares to drop by 4.3% on Wednesday, ending at $17.59. As market concerns have eased, the company's stock price has once rebounded by over 2% on Thursday.
Why to Shrink North American Business?
The international insurer operates in three main geographical regions, including Australia Pacific, International (encompassing Europe), and North America. A strategic review has revealed that the North America middle-market segment has faced several challenges over the past few years, prompting a decision to contract this branch of their business. Moving forward, QBE's North American operations will focus on three core businesses: Specialty, Crop, and Commercial.
In addition, due to the significant impact of group catastrophe costs this year, QBE was prompted to make the decision to cut underperforming business. The estimated group catastrophe costs for the five months leading up to May 2024 are approximately $500 million, in contrast to the catastrophe budget of $609 million for the first half of 2024. Notable events that have contributed to these costs include convective storms in the United States, floods in Dubai, and an estimated exposure of $175 million to $225 million to the civil unrest in New Caledonia.
Despite representing a gross written premium of $US500 million in fiscal year 2023, the segment has had an average combined operating ratio (COR) of 104% over the past 20 years, which means that, on average, it has not achieved underwriting profit during this period.
While QBE will incur a $US100m restructuring charge in 2024 to cover the costs of closing the business, analysts believe this adjustment will aid the company's long-term development. Jefferies analysts Simon Fitzgerald and William Richardson view QBE's actions as a significant milestone in its strategy to reduce volatility in the U.S. operations and enhance its long-term performance. Citi welcomed the move, stating the shift away from underperforming lines "should be taken positively."
For a long time we have been skeptical of QBE's mid-market strategy... at this stage, we think the relief of finally ending this longstanding underperforming business should outweigh the minor negatives on numbers.
What Other Positive Factors Lie Ahead for QBE?
1. QBE Continues to Increase Premiums
Insurance premiums are subject to cyclical fluctuations, alternating between periods of soft and hard market conditions. In Australia, insurers have recently informed customers of double-digit premium price hikes for most products, including home and car insurance, signifying a new super cycle of increases. According to ABS data, insurance prices have risen by 16.2% over the past 12 months, representing the highest annual rate since 2001. Despite the possibility of a slowdown in future increases, recent hikes have positioned insurers to generate significant profits in the years to come.
QBE has a strong exposure to the commercial rate cycle, which presents potential benefits for the organization. In May, QBE announced that it had successfully implemented premium increases averaging 7.3% across its global operations and key markets in America, Europe, and Australia. Notably, QBE is pushing for double-digit premium increases in Australia.
In the latest announcement on Wednesday, QBE confirmed its guidance for fiscal 2024 and forecasted a first-half gross written premium of $US13.1 billion and net insurance revenue of $US8.4 billion. This marks an increase from $US12.8 billion and $US7.98 billion, respectively, from the previous year.
Morgan Stanley said,“With strong rate increases still flowing through QBE's insurance book, and further cost-out benefits to come, we expect QBE's earnings profile to improve strongly over the next few years.”
UBS believes that QBE remains conservative and stands out among GI names.
We believe QBE stock remains inexpensive, considering consensus return on equity outlook in the high-teens and relative to global peers.
2. Ongoing strong investment returns with portfolio optimisation initiatives
QBE's 1Q24 exit core fixed income running yield of 4.7% is significantly higher than the same period last year at 4.2%, marginally up from the FY23 exit running yield of 4.6%. Additionally, QBE will remain to proceed with portfolio optimization initiatives, as emphasized by the CEO, Andrew Horton, during the company's annual shareholder meeting. The company is continuing its pullback from risky business lines, particularly the property portfolio, due to its past blowouts.
Our efforts over the near term will continue to focus on reducing volatility, which we expect will further support consistent outcomes for our customers, shareholders and people.
3. Attractive Dividend Yield
QBE has a reputation for being one of the most generous dividend payers on the Australian stock market. According to Bloomberg analyst Matt Ingram, QBE's dividend for 2024 may finish at the higher end of its payout target range of 40-60%. This is supported by a prescribed capital amount ratio that is at the upper limit of its 1.6-1.8x target range.
In a report released in May, Goldman Sachs predicted that this trend would continue, forecasting a dividend yield of 5.3% for this year, 5.4% for FY 2025, and 5.5% for FY 2026.
Source: Guardian, The Australian
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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