QBE shares drop on half year update and strategic review

Here's how QBE performed during the first half and its plans in North America.

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QBE Insurance Group Ltd (ASX: QBE) shares are under pressure on Wednesday morning.

At the time of writing, the insurance giant's shares are down 1.5% to $18.08.

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Why are QBE shares falling?

Investors have been selling the company's shares this morning after it released an update on its North American strategic review and its expectations for the first half of FY 2024.

In respect to the former, the insurer has revealed that it plans to commence an orderly closure of its North America middle-market segment.

According to the release, the segment represented gross written premium of ~US$500 million in FY 2023 and has experienced performance challenges over several years.

Management believes that the closure of middle-market will serve to refocus North America's strategy on those businesses, which hold more meaningful market position, relevance and scale.

The good news is that the closure will have no incremental impact on appetite or strategy for North America's three core businesses, Specialty, Crop and Commercial.

QBE intends to begin non-renewing middle-market policies in accordance with applicable state regulations, with gross written premium expected to begin reducing in FY 2024, before falling more substantially in FY 2025.

A restructuring charge of ~US$100 million before tax will be recorded in the FY 2024 result to account for costs associated with the business closure. Positively, the closure is expected to have limited impact on QBE's FY 2024 group combined operating ratio.

Half year update

With QBE rapidly approaching the end of its first half, it has taken this opportunity to update the market on its expectations for the six months.

The release reveals that first half gross written premium is expected to be ~US$13.1 billion. This represents constant currency growth of ~3% on the prior corresponding period, with net insurance revenue expected to be ~US$8.4 billion.

Group catastrophe costs in the five months to May 2024 are estimated at ~US$500 million. This compares to its first half catastrophe budget of US$609 million. Recent events have included US convective storms, the Dubai floods, and an initial estimate of US$175 million to US$225 million to account for QBE's net exposure to the ongoing civil unrest in New Caledonia.

QBE's investment performance has been solid. It notes that total investment income in the five months to May 2024 was US$643 million. This improved from US$406 million during the first quarter. The result includes a favourable credit spread impact of US$76 million and a risk asset result of US$104 million. As of May, the net impact from asset liability management activities remained neutral.

In light of the above and based on its preliminary view of its half year result, QBE continues to expect FY 2024 group constant currency gross written premium growth in the mid-single digits, and a FY 2024 group combined operating ratio of ~93.5%.

QBE shares remain up 18% over the last 12 months.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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