QBE will turn corner on North American commercial rehab yet in 2022

QBE may turn the corner on the rehab of its US commercial operations yet in 2022 led by a major rejigging of property, pushing the division to a long-sought underwriting gain in 2022 and an eventual drive towards the group’s cost of risk targets.

“I do believe the division is capable of delivering stable results,” QBE chief executive officer Andrew Horton told his company’s Q2 earnings call, forecasting “a return to underwriting profitability in 2022 and steady improvements thereafter.”

“I want to reduce the volatility we’ve seen in our financial results in the division,” all possible “if we demonstrate greater consistency than we have in the past.”

To date, the group has scuttled sub-scale and money-losing lines including trade credit, E&S and health care, halved personal lines to 7% of portfolio even with the sale of the Westwood agency still pending, halved wind and convective storm exposures to below 10% and trimmed the MGA partnership count.

Work remains chiefly focused in commercial, where results “have been challenged,” in large part by volatility in property and catastrophe. Combined ratios 2018-22 have averaged 110%, including 113% in property and 125% in middle-market, all well off from the group target of 90-95%. Mark some relief in the smaller sub-segments of workers comp and casualty.

“The course correction within commercial represents the largest and most immediate opportunity for North America,” Horton said.

Even excluding catastrophe QBE had been “over-indexed property” relative to the market and still shows “room for improvement” in underwriting quality. Property is at the centre a 2022 plan to cut some $400 million in exposures (versus sub-segment annual GWP around $700 million).

“As our exposure progressively rolls off into 2023, we expect that wind and convective storm exposures in the division should reduce by around 30%,” Horton declared. Property exposures remaining within the division enjoyed average rate increases “around 20%” and “will drive further improvements in underwriting.”

An increase in middle market would go a long way towards the sought-out portfolio balance, but QBE doesn’t even have enough to keep its own middle-market operations profitable and growth to scale cannot and will not come in uncontrolled leaps and bounds.

“Better scale would lead to profitability,” Horton says. Loss ratios look fine, but the sub-segment sinks on below-scale expense burdens. QBE has hired into growth, but worries about “growth strain.” Horton expects “a number of years to reach scale.”

Specialty lines, chiefly financial, accident & health and aviation, “has been key to our diversification strategy” as QBE seeks to a more balanced portfolio, even while having shed non-core and underperforming lines. The sub-segment still suffers a multi-year average cost of risk way too close to the 100% threshold, meaning growth can face margin headwinds at any point.

“While rate is decelerating, we still some opportunities for growth, although we expect a material reduction in the rate of growth for 2022 as we prioritize margin,” Horton said.

In the mainstay division of US crop insurance, Horton is happy to lean on scale and strong performance to date, but has increased reinsurance to dampen volatility and restore overall portfolio balance.

“While I am clearly a fan of crop its return profile does contain a high degree of variability,” Horton said. Better management of net retentions “help increase confidence about our planned return on crop this year.”

Crop underpins QBE North America, with $3.3 billion of QBE’s ca. $6.3 billion in North American premium, a division-beating 2018-22 combined ratio at 94% and 22% CAGR growth over the period.

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