Interactive Investor

Stockwatch: this insurer is really building momentum

13th August 2021 12:03

Edmond Jackson from interactive investor

Our stocks writer has his eyes on an insurance group from Australia that is showing promising signs of good times ahead.

A strongly performing insurance stock is £2.6 billion insurer Beazley (LSE:BEZ). Cute timing helped, also knowledge of the Lloyd’s market where it is a specialty operator. 

From early 2010, the long-term chart enjoyed a fine run from 90p near 600p by June 2018; it then consolidated sideways until the Covid 2020 sell-off took it down to 360p, but unlike most stocks the drift continued down to 300p last May. 

The trigger for Beazley re-rating over 40% to 424p currently, was a first quarter update which cited 16% rises in gross premiums written, likewise in renewals on premium rates.

The current CEO said: “We have had a positive start to the year with good rate momentum well ahead of our expectations as well as continued strong targeted growth. We expect favourable market conditions to continue and are well positioned to take advantage.” 

The forward price earnings (PE) is near 12x if Beazley meets expectations to transform a net £46 million loss into £254 million profit this year – recovering 2016 performance – then £346 million in 2022, which would be a record.

A modest rating, albeit based on a big uplift yet to be proven. With the Lloyd’s market, it can significantly help to understand the dynamics of underwriting groups, so I am not going to whip myself for missing this re-rating. 

The rally does look to be continuing however, partly because Beazley fell further than most stocks during the pandemic. 

Beazley’s CEO moves Down Under  

Taking a broader long-term view on a stock, I am intrigued how Andrew Horton stepped down at the end of last March – to become CEO of QBE Insurance Group (ASX:QBE) from its Sydney, Australia headquarters, effective from this September. The big profits uplift expected is a function of work he has overseen. 

Years ago, it was virtually impossible for retail investors to consider international stocks like this, but an advantage of the Interactive Investor platform is giving you just such an opportunity. 

Coincidental with this chance at the top, QBE yesterday declared a turnaround for the first half of 2020: from a $US 710 million net loss (£515 million) when impacted by underwriting losses into a $444 million profit.  

This period did benefit from a strong environment for insurance, partly offset by higher reinsurance expense also claims for individual risk and catastrophes such as a Texas winter storm.

Moreover, investment returns transformed from a $90 million net loss into a $58 million profit, helped by narrower credit spreads and higher returns from growth assets. 

QBE increased its interim dividend from 7 Australian cents per share to 11 cents. Despite catastrophe incidence and crop variability typically being higher in the second half year, the board expects ongoing supportive market conditions to mean a higher final dividend also. 

The stock has risen 10% to circa AU$ 12.5 in response, implying an insignificant circa 2% yield – not dissimilar to Beazley’s 2.6% - although the market is likely more interested in what the dividend increased imply about underlying trading. 

My key point is these results implying a decent canvas for the new CEO to work with, the combination of which could be bullish - say on a two to five-year view, for his initiatives to bear fruit.  

Current interim CEO’s theme of ‘building momentum’ 

Despite his underlying corporate initiatives, this appears to relate significantly to a rebound in global economic performance, for example the International Monetary Fund citing projections for 6% growth this year 2021. 

In which case, disruption caused by the Delta variant of Covid-19 needs watching: Australia in particular is suffering right now because its population remains largely unvaccinated.

In early 2020, the country was a role model for dealing with the virus – closing its borders and tracing every single reported case.

More recently however, fears over the AstraZeneca vaccine due to rare blood-clotting, then supply delays with the Pfizer alternative, has meant over half of Australians are back in lockdown. 

Call me cautious but it seems liable to temper the macro context, QBE has lately benefited from. Some 30% of its annual gross written premiums are written in Australia and New Zealand, which also account for over half of its underwriting profit.

Other key regions are North America and Europe, with Europe and Asia consolidated as an international division. 

I feel it appropriate to regard this and other general insurance stocks as part-cyclical: QBE operates chiefly in property and “casualty” insurance – a broad category across vehicles, liability and theft. 

A tactical stock-picking question is therefore whether ongoing change at the company level - with a capable new CEO due - outweighs this economic risk, such that QBE already rates a “buy” or is one to watch with a view to accumulate. 

QBE Insurance: summary income statement and underwriting performance
Six months to 30 June

US$ million

 Statutory Ex-Covid impacts
Gross written premium8,01110,2038,041
Gross earned premium6,5097,9806,539
Net earned premium5,5066,5715,556
Net claims expense-4,307-4,023-4,041
Net commission-903-1,009-911
Underwriting and other expenses-820-897-793
Underwriting result-584642-189
Net investment income (loss)-3032-60
Insurance profit (loss)-584674-249
Profit before tax-778530 
Taxation (expense) credit68-86 
Profit after tax-710444 
Net claims ratio78.261.272.7
Net commission ratio16.415.316.4
Expense ratio14.913.714.3
Adjusted combined operating ratio103.493.397.4
Insurance profit (loss) margin10.610.3-4.5

Modernisation of the business 

QBE has a long history going back to the North Queensland Insurance Company in 1886, listing in 1973 via the merger of three firms represented in its name-title. It then acquired many companies including overseas, hence a likelihood there is still scope for streamlining. 

The interim CEO cites continuing to identify both opportunities to improve performance also the customer experience; although a “digital transformation” sounds like what all financial services businesses need, to be competitive.

Applications are being moved to the cloud and “we are ready to embark upon selective areas of digital enhancement that will form the foundations of a truly modern business.” 

IT improvement is also behind a target to get the group’s expense ratio down to 13% by 2023, after interim results show it improving to 13.7% from 14.3% in the prior period. 

The US operation has taken steps to improve its operating leverage and also cut its real estate – with a re-location away from New York and Atlanta.

This side of the group has just enjoyed a 31% hike in gross written premium both as renewal rates improved and crop premiums jumped 48% helped by soaring commodity prices.  

This compares with the international side up 11% and Australia Pacific 18%, such that group interim gross written premium is up 27%. 

On underwriting, the international side has the best performance with a combined operating ratio (claims and costs versus premiums) of 89.1% (down from 92.8% like-for-like) and Australia Pacific at 91.0% (down from 95.3%) with the US on 100.9% (down from 103.8% when there were significant prior year accident claims). 

Gut sense that Horton has made a good decision 

As an investment rationale, QBE has yet to truly stack up: it comes across as just another insurer with no glaring competitive advantages, albeit with decent market positions. If macro data turns adverse, then expect its boss’s narrative to change also. 

Yet this presumably is what has tempted Horton: a group that does not require drastic restructuring and shows itself responding well already to better conditions.

In terms of his skills set, the opportunity rates better at QBE relative to the current situation at Beazley – now in fine shape. 

It is speculative but I think justified to take a long-term positive stance on QBE. Who knows if the months ahead could offer better prices than AU$12.5. Strategically: Buy.   

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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