Enhanced Diversification Will Reduce Volatility And Improve Future Earnings Quality

Key Takeaways

• Enhanced operating model and strategic capital optimization improve efficiency and support higher returns, positively impacting net margins and earnings growth.
  
• Focus on market expansion and product innovation to drive stable revenue growth and reduce operational risk through diversified underwriting.
  
• Challenges in crop insurance, emerging competition, noncore segments, inflation, and modernization expenses could pressure QBE Insurance Group's margins and profitability.

Catalysts

Engages in underwriting general insurance and reinsurance risks in the Australia Pacific, North America, and internationally.

• The company is advancing its operating model to improve efficiency and effectiveness, which should unlock significant value and impact net margins positively.
  
• There's a focus on expanding into adjacent markets and innovating with new products, which is likely to drive sustainable mid-single-digit volume growth, impacting future revenue positively.
  
• The enhanced balance and diversification in the underwriting portfolio will likely lead to more stable and predictable underwriting performance, influencing earnings quality and reducing volatility.
  
• The reduced catastrophe costs and improved geographical and product-based balance should lower operational risk and improve net margins.
  
• The strategic initiatives to optimize the capital allocation and management should support higher return on equity, which would favorably influence earnings growth.

QBE Insurance Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming QBE Insurance Group's revenue will decrease by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.6% today to 10.2% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $1.27) by about February 2028, up from $1.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, up from 11.9x today. This future PE is lower than the current PE for the AU Insurance industry at 20.0x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.37%, as per the Simply Wall St company report.

QBE Insurance Group Future Earnings Per Share Growth

Risks

• Lower-than-expected performance in the crop insurance segment is a concern, with a combined ratio of around 99%, potentially affecting net margins and earnings.
  
• Emerging competition in specialty classes, such as financial lines, could threaten rate adequacy and affect revenue growth.
  
• Continued drag from noncore segments in North America is projected to result in underwriting losses, negatively impacting profitability.
  
• Inflationary pressures, particularly in motor and construction costs, continue to present challenges, possibly impacting net margins.
  
• Elevated chain expenses aimed at modernization may pressure the expense ratio, affecting net profitability.

Valuation

• The analysts have a consensus price target of A$22.619 for QBE Insurance Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$25.0, and the most bearish reporting a price target of just A$16.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $19.8 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of A$21.46, the analyst price target of A$22.62 is 5.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.