QBE an unfailing disappointment: analyst

  • By Elizabeth Fry

The market has reacted coldly to the news that Patrick Regan has been hired as of QBE Insurance Group’s new boss with few believing a change of chief executive has the power to fix the troubled insurer.

The general view is that Regan, the current chief executive of QBE’s Australia and New Zealand business and previous finance head, will have his work cut out for him to ease most of the immediate risks. The company’s share price barely budged on news of the new hire.

At close to $10 per share, QBE could be presenting a strong opportunity but the difficulty is that no one really knows, says Citi’s Nigel Pittaway.  

“Those with a relatively high-risk appetite may see it as tempting, but for a number of investors it is likely to prove uninvestible currently given the string of recent disappointments," he said.

"So, while there may be a significant opportunity for the brave - if management can turn the business around - we are not recommending it currently.”
 

Walking away

As the insurance specialist sees it, QBE does not seem confident it can quickly fix the issues in the troubled Emerging Markets business that have resulted in a 100-basis point hole in group underwriting margins.

Sadly, the global insurance giant expects the division to return to underwriting profitability only in 2019.

For a start, Pittaway wrote in a client note, QBE seems to be walking away from its previous target of 93 per cent combined operating ratio by 2018, saying instead that this will depend on external factors as well as its need to obtain a line of sight on market pricing and determine how quickly it can eliminate the Emerging Markets drag.

Given the need to remediate its Emerging Markets division, the analyst went on to say, it also seems unlikely to achieve other medium-term targets outlined at its May 16 Investor Day.

“We believe investors’ confidence in the company is low, having had to endure a string of downgrades stemming from unexpected issues."

Pittaway listed the problems, which variously include the US program business, Italian and Spanish medical malpractice, Argentinean workers' compensation, US crop, Australia compulsory third-party insurance and commercial business, and most recently Emerging Markets.

“Each time QBE has promised to address or divest the offending business, but new problem areas have consistently sprung up from unexpected corners," he said.
 

On the bright side ...

Further, he pointed out that investors might also question why the buyback - announced six months ago - has just commenced because QBE only now believes the share price offers enough value.

“This is small comfort for investors who bought post the February result, when the buyback was first announced.”

On the bright side, Pittaway acknowledged the buyback should offer some share price support and that that 2017 first half topline growth was an improvement, with 3 per cent constant currency gross written premium growth.

He also noted the positive rate increases overall and that QBE remains exposed to rising yields and premium rates.

Moreover, the analyst gave QBE props for the remediation of the Australian business, which seems to be largely complete although rising loss ratios in lenders mortgage insurance are likely to remain a drag.

“Consequently, we see significant risk as the stock remains a value trap in the short term. At some stage things will likely turn but calling the timing of this seems very hard currently, suggesting to us that that staying on the sidelines is best for now," he said.