Here is my insight on QBE. The pandemic has of course severely...

Here is my insight on QBE.
The pandemic has of course severely disrupted many businesses across the globe, but the reality is that QBE’s net claims exposure here has not changed due to reinsurance cover. And on the other side one major outcome of the pandemic, and the associated stimulus is rising inflation which will provide a further tailwind to premiums, which are already on the rise, along with investment income.

While the ruling has gone against QBE, the insurer has been prudent in allowing for claims flowing from Covid. QBE has allowed some US$785 million for Covid claims, with the probability of claim adequacy having been calculated at the top end of an 87.5% to 92.5% range. As management noted, the additional risk margin charge will be largely offset by rising investment income and premium strength.

This is the bigger story here for QBE, and with premiums already on the rise, further tailwinds will come through to earnings as the longer end of the bond yield curve inflects higher with rising inflation.

The trends in premiums were highlighted in a market update by the company last month, and these were encouraging, and even if investors were more focussed on the bottom-line loss (the FY20 statutory loss is estimated at $1.5 billion) due to Covid. The company noted that pricing strength has accelerated into the fourth quarter and was particularly robust in the International and North America segments. Drivers include poor industry profitability, catastrophe experience, rising reinsurance costs, and lowest investment yields.

There are also signs that investment income is moving more in the company’s favour. At the update in December, management noted that credit spreads had narrowed significantly in the third and fourth quarters. So much so that mark-to-market losses on the core fixed income portfolio at 30 June had now reversed.

Effectively QBE’s investment income has (as many with bank deposits will know), has been pressurised by falling interest rates. But for QBE what is more relevant is the yields on longer dated bonds (to where the portfolio is tilted). These have already inflected higher recently, and if we are right on a ‘V’ shaped global economic recovery playing out this year, then this trend should gain further momentum. This would augur well for QBE’s investment income and bottom line.

QBE is in our view much more streamlined that it was years ago, and a rising premium environment is providing a tailwind to the bottom line. And if we are right about inflation pushing higher in the years ahead, then investment income should also rebound as bond yields push higher. An announcement around a replacement CEO could also provide upside impetus for the shares given investor sentiment is at such a low ebb.

Overall I believe that QBE will declare strong profits because a lot of people are not going to claim payouts because we haven’t been doing anything except staying at home. This will show on the results for motor Insurance.

Also appointed a new CEO for Australia that has worked in the M&A for Westpac Insurance. Here is more information I regards to that. https://www.insurancenews.com.au/corporate/qbe-appoints-australia-ceo-still-to-name-group-head