QBE Insurance is on our shares to buy list and will make room in our portfolio when we have capacity. It’s main business line is Property and Casualty insurance and unlike health insurers like Medibank (MPL ASX) which just focus on Australia, it has presence across all major oversea markets. It is the largest property and casualty (P&C) insurer listed on the ASX. It also has a significant presence in the Lender Mortgage Insurance market.
The company has been in recovery mode since the GFC where the strategy has shifted from acquisition led growth and growing top line premiums to focus on improving current operations and being more selective in the markets where it wants to operate.
The recovery was on track pre-covid but we were reluctant in taking a position due to numerous issues in the underlying business. However given the time frame of the clean up, there seem to be light at the end of the tunnel. If there is a pull back in the broader market indices (e.g ASX 20), we would look to initiate a position ourselves.
Quick thoughts on the company
- From the operation perspective the management have stopped the decline in gross written premiums and realigned the cost structure for the business. With the core business stabilized, the focus will return to sustainable shareholder return on equity and top line growth.
- QBE investment portfolio is conservative with majority of allocation to fixed income. Investment income has been depressed in the last 5 years due to the structural decline in interest rates across the globe. European rates are near zero, US 10 year treasury at time of print is sub 1%. Our view is that the rate market has stabilized and could not get any worse. QBE share price is not pricing in any material uplift in investment income from increase in interest rates.
- QBE being a global insurer has majority of its earning sourced from around the globe. A weak Australian dollar exchange rate against USD and EURAUD will continue support earnings. As the AUD is a risk on currency. Any material improvement in Australian dollar could be driven by improving global economic fundamentals which will be followed by equity markets and interest rates. However improvement is not our base case.
QBE Dividend History
The company reduced dividend multime times and raised numerous amount of capital after the GFC to deleverthe balance sheet.
Future earning power and dividend payout will be dependent on continue operation improvement. Improvement to investment income from stabilization of the investment grade fixed income market will be icing on the cake.
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QBE Dividend Dates
Interim Dividend : October
Final Dividend : April
Risks to QBE Share Price
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Key risk we see for QBE is the Australia Mortgage Lender Insurance business line. The business has been extremely profitable and decent contribution to the bottom line. However the LMI business is a feast and famine business where it is highly leveraged to the residential real estate cycle.
Australia house prices has been in a secular bull market for more than a decade. As we noted in our Sydney property market forecast, there is significant leverage in the system matching the the increase house prices.
If there is any slowdown in Australia house prices which is likely post Covid, QBE domestic earnings will be hit and it would be another stumbling block in its path to profitability.
A drastic slowdown in housing driven by unemployment is a long tail event in our forecast, however we would not be surprised if earnings are downgraded again.