The share price of QBE Insurance Group Ltd (ASX: QBE) has fallen back over the last week following the announcement from Genworth Mortgage Insurance Australia (ASX: GMA) that Westpac Banking Corp (ASX: WBC) would be taking its Lenders Mortgage Insurance (LMI) responsibilities in-house.
In 2014, the Westpac account contributed approximately 9.5% of Genworth's 'New Insurance Written' and 14.0% of 'Gross Written Premium' and highlights the risks inherent in companies like Genworth that provide only one type of insurance.
Genworth is a competitor to QBE in the local LMI market, but QBE is diversified among many continents and insurance types, reducing the earnings risk.
Risk to QBE
The risk to QBE is that the other big banks, which utilise QBE's LMI offering, could take the same action as Westpac. QBE doesn't disclose its revenue from Australia LMI premiums, but with Australian operations accounting for 27% of gross written premium in the six months to June 30, we can assume that the impact would be meaningful to the group.
The trouble is that this is all speculation for now as its unknown whether the remaining big banks are considering removing the middle man. For now, the main question on shareholders' minds is what QBE will produce tomorrow.
24 February – D-day for QBE Shareholders
As I've written previously, QBE will report its full-year results tomorrow and shareholders have reason, for the first time in many years, to be relatively confident. Why?
- QBE hasn't lowered its forecast
- QBE's revised forecasts appear achievable
- QBE is more resilient now
QBE's revised financial year targets are gross written premium in the range of $16.6 – $17 billion, net earned premium of $13.9 – $14.2 billion, insurance profit margin of 8.0% – 9.0% and a net investment yield of 2.4% – 2.7%. These targets have been downgraded from 12 months ago, so any signs of deviations to the low side will be bad news for the share price.
Bonus Upside – QBE's big dividend
If QBE can get back to paying a dividend of similar magnitude to that in 2011, the dividend yield based on today's price is approaching 12%. Other insurance companies like Insurance Australia Group Ltd (ASX: IAG) and Suncorp Group Ltd (ASX: SUN) offer higher immediate yields but their future potential pales in comparison to QBE's.
