Insuring its own future – the QBE turnaround

QBE (ASX:QBE) has been a long-term holding of the Australian Eagle Long portfolio, albeit one that has faced its share of missteps over the years. However, in recent periods, the business has undergone a clear and deliberate transformation under current management, with a renewed focus on profitability, discipline and simplification. The company’s recent internal improvements including more disciplined underwriting, portfolio simplification and stronger capital management are increasingly being recognised by the market, just as external conditions have turned favourable. The current environment of rising insurance premiums and higher bond yields plays directly to QBE’s strengths, providing a supportive backdrop for earnings momentum and improving returns on equity.

A key driver of the turnaround has been the strategic exit of non-core and underperforming business lines. QBE has materially scaled back or exited operations in Asia, Latin America and other specialist portfolios that lacked sufficient pricing power or market positioning. These changes have redirected capital toward markets where QBE holds genuine competitive advantages. As a result, the Group’s combined operating ratio (COR) has consistently improved, reflecting more disciplined underwriting and reduced exposure to loss-prone segments.

At the same time, the macro environment has provided a tailwind. U.S. short-term bond yields remain elevated, driving a substantial uplift in investment income from its about A$30 billion investment portfolio. This is particularly impactful for QBE given the relatively short duration nature of the book. With cash earnings underpinned by both underwriting and investment returns, the company’s profitability has become more balanced and resilient.

Capital management has also improved markedly. After years of disappointing shareholder returns, the company has begun increasing its dividend payout ratio, reflecting greater confidence in an improving earnings quality profile and surplus capital generation. We believe further improvements in capital efficiency are likely, especially as attritional claims normalise and internal capital buffers strengthen.

Despite this progress, QBE continues to trade at a valuation discount to insurance peers. In the investment team’s view, the market has yet to fully reflect the structural improvement in underwriting quality, operating leverage from simplification and the recent uplift in investment income. With management now executing on a clear strategy in addition to tailwinds from rate increases and capital discipline, we see scope for further earnings growth and a multiple re-rating over the medium term.