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Switch: IAG 2044s (Call in 2024) into QBE 2036s (Call in 2026)

We like insurers, especially in an environment of higher inflation and interest rate hikes and believe it should be a pivotal part of an investor’s bond portfolio. An increase in interest rates will benefit sectors which invest in government bonds.

Insurers tend to invest their cash into government bonds or relatively liquid securities which perform better in higher interest rate environments. Furthermore, insurers tend to have inelastic demand profiles and so can appropriately deal with higher inflation.

However, within the insurance sector, we have found an excellent opportunity where there is better risk/return.

Buy QBE 2036s (call in 2026) – S&P: NA, Moody’s: Baa1
Sell IAG 2044s (call in 2024) – S&P: BBB, Moody’s: NA


  • Move up in credit quality – from S&P: BBB to Moody’s: Baa1
  • Improve the yield to call (YTC) – from c. 2.9% to c. 3.6% for an additional two years to call
  • Both are floating-rate subordinated notes, but the QBE 2036s pay a margin of BBSW +275bps versus the IAG 2044s − which pay a margin of BBSW +210bps.


  • QBE and IAG have been recently affected by a court case brought about by policyholders around COVID-19 business interruption insurance. However, QBE came out of these findings relatively unscathed. Meanwhile, IAG now has a class action around its disclosure of information. This is in addition to the ASIC legal action on IAG surrounding the increased NRMA customers’ premiums.
  • QBE reported excellent HY22 results, showing a strong return to profitability and increased its HY22 dividend as a result. The favourable global insurance pricing cycle is a major tailwind for QBE earnings, with the insurer likely to outperform market expectations in FY22 alongside reserve strengthening.
  • IAG reported poor FY21 results and recently downgraded its earnings guidance for FY22. Many weather events in H1 2022 and inappropriate reinsurance (versus peers) will impact IAG earnings, with the insurer likely to underperform market expectations in FY22.


Peer Metrics

Metric QBE IAG
Combined Ratio 102.35% 97.64%
PCA Multiple 1.73x 1.86x
CET1 Ratio 1.09x 1.06x
Return on Invested Capital 12.83% 10.42%
Total Debt/Capital 23.73% 28.18%

QBE as at HY22, IAG as at FY21
Source: Bloomberg

QBE reports FY22 results on 18 February 2022. IAG reported H1 2022 results on 1 February 2022. Please speak to an IAM Sales Representative who can help facilitate this trade.

Switch: IAG 2044s (Call in 2024) into QBE 2036s (Call in 2026)

Chart 1. Yield to Next Call

Source: Bloomberg

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