QBE Insurance's cost management track record disappoints analyst

Expense ratio edged up to 31.1% of NEP.

According to the Commonwealth Bank of Australia, QBE’s cost management track record has underperformed peers. Over the last four years, QBE’s track record on costs has underperformed IAG and SUN. 

From FY09 to FY12, QBE’s expense ratio has increased from 29.3% to 31.1% of NEP, which compares with SUN’s reducing from 27.5% to 23.7% (delivering $235m pa of cost synergies via its Building Blocks program) and IAG from 29.4% to 27.1% over the same period.

Here's more from CBA:

QBE’s Operational Transformation Program to address the need for cost control. In February 2013, QBE announced that it expects the program to cost $330m over the next three years, but deliver $250m pa of cost savings on a run‑rate basis from FY15f, resulting in a reduction in the group’s expense ratio by ~1.6%.

Cost reductions will be across claims, operations, finance, IT, HR and procurement, and focused in Australia, North America and Europe and has confirmed that approximately 700 jobs will be relocated to Manilla and Bangalore.

We see material upside risks to FY15f numbers if QBE successfully implements the program. Given QBE’s lacklustre track record on cost control, we only allow for a 0.3% improvement in our FY15f expense ratio by FY15 (consensus 0.8%).

Should the full $250m of cost synergies be realised, we see material earnings upside risks of 10% and 6% by FY15f to CBA’s and consensus’ numbers, respectively.

Under new leadership, QBE has taken real steps to address the cost base and restructure management. The dividend has been re‑based to sustainable levels and earnings guidance looks achievable to us for the first time in a while. Nevertheless, at 1.4x book value and 3.0x NTA, we see better value in the domestic insurers.