QBE Insurance’s (ASX: QBE) first-half 2025 profit increased 28% to USD 997 million, largely driven by lower catastrophe costs and prior-year claims that cost less than was reserved for. The top-line growth of 6% and higher investment income also positively contributed.

Why it matters: Reaffirmed guidance of mid-single-digit gross written premium growth for 2025, and a combined ratio of around 92.5% are both in line with our forecasts. Rate increases are already slowing, averaging 2% compared with 6% last year, and we expect them to continue to trail inflation.

  • Given elevated profitability (QBE’s 19% return on equity is well above its 10-year average of 7%), we expect increasing competition to keep rate increases below growth in claims costs. There are already pockets of weakness. In property, for example, rates are falling in some areas.
  • QBE’s aim to increase volumes across product lines, regions, and segments could undo some of the transformational work completed to derisk the business. With competitors also wanting to expand, increased competition is expected to lead to rate pressure and lower returns.

The bottom line: We increase our fair value estimate 3% to $16.50 per share for no-moat QBE, on minor earnings changes with a larger-than-expected investment pool, and the time value of money. On high expectations, shares slipped 7% but still trade over 30% above our fair value.

  • Our medium-term combined ratio of 94.5% is higher than current levels, implying profits go backward. While we view part of the claim reduction achieved by QBE as structural, with portfolio exits reducing exposure to large catastrophe claims, industry conditions have also been favorable.

Long view: Our forecasts assume return on equity retraces to near 11.5% over the medium term. While down materially from current levels, it is in line with our view that the insurer does not have a maintainable competitive advantage, and is reasonable given the historical experience.

QBE Insurance buoyed by higher premium rates and investment income

QBE Insurance is an international property and casualty insurance company with over USD 22 billion of annual gross written premiums. It writes about 25% of its annual premiums in its home region of Australia and New Zealand and over 30% in North America. Commercial and specialty insurance lines make up two-thirds of insurance revenue, and the offering is extremely wide-ranging across property, auto insurance, agriculture, public/product liability, professional indemnity, workers compensation, marine, energy and aviation, and accident and health. The size and diversity of insurance is built on the back of hundreds of acquisitions made over decades.

The extended period of global growth via acquisition failed to deliver the cost synergies or scale benefits management had hoped. The strategy has rightfully shifted, and progress is being made in turning the business around. The balance sheet has been strengthened and operational efficiency is improving. We like the way senior management has reshaped insurance portfolios, cut costs, tightened underwriting standards and increased accountability across the group. In addition to divesting several businesses, a greater focus on returns has led to groupwide improvement in attritional claims. While reducing premiums, decisions to reduce exposure to certain areas—for example, large commercial properties and properties in higher-risk areas—has improved profitability and reduced volatility.

The performance of investment markets brings another element of volatility to earnings. QBE manages a sizable investment portfolio of over USD 30 billion, with both policyholder and shareholder funds. Around 85% is held in cash and fixed-interest investments, with the remainder spread across equities and alternatives. Consequently, the group’s profitability is at risk from changes in interest rates, credit spreads, and to a lesser extent equity markets. We expect returns to fall over the medium term as global cash rates fall.

QBE bulls say

  • Rising insurance premiums, underwriting discipline, productivity initiatives, and a focus on profitable growth should drive excess returns.
  • The US operations have significant upside potential. Years of disappointment eventually lead to premium rates reflective of the underlying insured risks.
  • A strong balance sheet and positive premium pricing support dividend growth and the return of surplus capital to shareholders.

QBE bears say

  • Rising competition erodes market share from incumbents, such as QBE, regardless of the impact on short-term profits and returns.
  • A higher incidence of large claims events from major catastrophes could reduce profitability such that dividend cuts and potentially dilutive capital raisings are needed.
  • Insurance becomes unaffordable, resulting in policy downgrading and cancelations.

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Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.