The preferred insurance play of UBS, Morgan Stanley

Australian insurers have been a popular investment choice for a while now, for a couple of key reasons. They’ve been broadly successful in passing on higher costs to policyholders and their large cash floats have delivered strongly during the higher rate environment. The three largest general insurers – QBE Insurance QBE, Suncorp Group SUN and Insurance Australia Group IAG ­­– have seen their share prices rise between 17% and 30% in the last 12 months.

QBE, SUN and IAG share prices over 12 months

Source: Trading View. Click here for full size image (for best results, right click and select "Open link in new window")

It should be noted that most of Suncorp’s share price gains in the year so far have come since mid-February. That’s when Suncorp was cleared to sell its $4.9 billion banking business to ANZ Group, after their appeal to the ACCC overturned the regulator’s previous refusal.

The largest in the category, QBE ­­operates in 27 countries and provides insurance for cars, homes, and businesses. While the insurance sector has faced scrutiny over affordability concerns, QBE management noted premiums in Australia grew 2% in the first quarter 2024 at its AGM last week – a rate that is now falling. QBE was cited as one of a few preferred dividend plays by Plato Investment Management’s Dr Don Hamson in March.

QBE 12 month share price (Source: Market Index)

What UBS analysts think

• Rating: BUY

• Price target: $21, up from $20

In response to QBE’s recent first-quarter trading update, UBS analysts say the key drivers appear to be ahead of their forecasts for 1H24. Gross written premium (GWP) growth in the mid-single-digits and a combined ratio (COR) of around 93.5%– were confirmed “and we continue to believe remains conservative.” Note: COR measures the profitability of underwriting activity

Repricing tailwinds continue

The UBS analysts cite QBE's International segment as the standout, with GWP growth of 17% driven by:

• repricing (+5.1%),

• strong retention (88%), and

• new business.

“Overall 1Q24 repricing is firmer than we had anticipated, particularly in Australia (+11.0%) and North America (+10.9%) which likely reflects portfolio actions.

Positive margin implications

While noting that the COR for 1Q24 wasn’t disclosed, the UBS analysts see the claims experience as tracking “in line with plan”.

On the cost front, they say category costs were “~$300m, well ahead of the prior corresponding $480 million, and relative to 1H24 budget $609 million.

“If we conservatively ignore monthly seasonality, this implies 1H24 CATs [catastrophe claims] are running ~$100m better than budget and our previous forecasts.

“This net benefit did not trigger any change to FY24 COR guidance, which may suggest that guidance now has a reasonable buffer. We estimate underlying COR in 2H23 was 93.2% and we are modelling a modest improvement to 92.7% in 1H24."

They also note that running yields and mark-to-market items were above their expectations, providing further earnings support this year.

What Morgan Stanley analysts think

• Rating: Overweight

• Price target: $20.10, up from $19.80

The update was in line with expectations, “with slight upside earnings risk on better CATs and investment income,” said analyst Andrei Stadnik, FIAA and research associate Sally Zhou, CFA.

“Pleasingly, FY24 guidance re-affirmed: mid-single-digit GWP growth and COR of ~93.5%.”

They note the 1Q24 gross written premium growth of 2% was affected by crop prices and the insurer’s exit from non-core segments of the US and Australian property insurance portfolio.

“Ex-crop, GWP was +9% versus 8.2% in 4Q23 with pricing lower at 7.3% in 1Q24 versus 8.2% in 4Q23,” said Stadnik and Zhou. They forecast lower GWP growth of 4.2% and 5.7% across 1H24 and FY24, respectively.

They also call out the US$300 million of catastrophe claims to April 24 as tracking below the US$609 million 1H24 budget.

“Only modest reserve strengthening from prior year CATs on European weather events from 2023. No other reserving comments although this usually becomes clearer from 2Q onwards,” says UBS.

In QBE’s investment portfolio, the analysts note the annualised yield based on current interest payments on fixed income assets in 1Q24 was between 4.7% and 4.8% as of 7 May 2024. Their anticipated yield for 1H24 is 4.8%

With the portfolio having risen $126 million based on mark-to-market valuations on credit spreads, they said tighter spreads see risk asset returns modestly ahead of Morgan Stanley estimates, “although this could be volatile.

QBE’s share price closed at $17.62 on Wednesday 15 May.