Thoughts on QBE & bank hybrids please

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Question asked 15/07/2023

Thoughts on QBE & bank hybrids please

Hi James and Co. Just wondering whether you could make comment on QBE I notice today (Thursday) that QBE has dropped 2% on a very strong day on the market ..presumably as a result of the US news that inflation is dropping and short term bonds rates are set to reduce ..your website shows consensus price targets significantly higher than current price for QBE but I wonder whether the prospects have now changed for QBE and it may be time to exit. On a similar theme I wonder whether you might be able to give an update on your thoughts on bank hybrids ..if indeed we are about to see bond rates drop what is the prospects for hybrids going forward ..is it a good time to think about lightening ? As a general comment I did note recently in discussing the income portfolio you acknowledged the role of hybrids in balancing out the down performance of some other holdings but have noticed that in general the hybrids don't attract much commentary from you in your reports..would love to hear more ongoing commentary on how you are viewing the hybrids as part of the income portfolio discussions ie what their prospects are in the (current and) changing share market outlook. Many Thanks Don

Answer

Hi Don,

Given our view that bond yields have peaked and are likely to fall, the macro backdrop is now less supportive of QBE, however there are some other aspects to consider. Operationally, they have simplified their business and instead of writing insurance for everything, they are focusing on the areas they have an edge – we think this is a good move. Insurance premiums globally are also on the rise, and this is also driving better earnings at QBE.

Distilling these factors down, we are neutral QBE, and if we did hold, we would be lightening or selling our position given our view around the macro tailwinds (higher rates) turning into macro headwinds (lower rates).

Regarding hybrids, we do try and cover these as much as we can, however not a huge amount changes in the space. Hybrids pay a margin over the 90-day bank bill rate, so although we think bond yields have peaked, we don’t think that we’re in for rate cuts any time soon. As it stands, we are still getting over ~7% yield from tier 1 major bank hybrids and we like the fact that if we’re wrong on bond yields, and these do rise from here, we will not lose capital value given they are floating rate in nature. We continue to like bank hybrids for ~20% of our income portfolio, largely irrespective of what interest rates do.

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QBE Insurance Group Ltd (QBE)

LAST UPDATED 13/07/2023 15:50

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