QBE Earnings Expected To Rebound on Price Increases but Shares Looking a Little Overvalued

In 2020 natural hazards events were frequent and large, returns on investment portfolios tumbled, and uncertainty around COVID-19-related business interruption claims lingered, painting a bleak outlook. In February 2021 when shares traded below AUD 9.00, we appeared more optimistic about future earnings upside than the market. Insurance margins have been under pressure globally, with most of the earnings headwinds not specific to QBE. We viewed the weak margins and return on equity as unsustainable and this validates why QBE has been successfully increasing prices. QBE reported an average price increase of 12.6% in the fourth quarter of 2020. Our forecasts imply QBE generates an insurance margin of 5% to 6.5% in fiscal 2021 and 2022, which compares with a 10-year average of 5.5%. Momentum in the share price is likely also being helped by rising bond yields. Over 90% of the insurer's USD 28 billion investment portfolio is invested in fixed income, and U.S. five-year treasury yields have risen to 0.8% from 0.4% in February 2021. Year to date, shares are up about 30%, while the ASX 200 Index has risen 9.5%, leaving QBE shares trading at a premium to our AUD 10.50 fair value estimate.