Shares of the Week – QBE Insurance Group (QBE)
QBE Insurance Group (QBE) is a blue chip stock a leading provider of general insurance and reinsurance services in Australia, the Pacific, Asia, the Americas and Europe.
The company is Australia’s largest insurer, and one of the top 25 insurers worldwide.
It has offices in 45 countries, and offers a range of retail and wholesale insurance products, across a gamut of insurance lines.
Though QBE faced financial sector pressure over the global economic downturn, the company was able to regroup somewhat in 2009 on overall global economic bullishness.
However, QBE’s stock has fallen in 2010 on a tough time for global insurers. The company recently reported below-expectations FY09 results, with profit up only 6% to $1.97 billion.
On Monday, QBE issued a profit warning, stating it now expects 1H10 net profit to fall by about 40% on-year, primarily due to lower investment income.
Peer Insurance Australia Group (IAG) has also issued a dire profit downgrade, indicating a tough time awaits our insurers.
Riding out volatility…
Financial stocks came under severe pressure over the course of the global economic downturn, especially evident in QBE’s volatile stock ride over 2008.
Though market conditions were tough for QBE over 2008, the stock failed to suffer to the extent of its peers throughout the year (albeit after a tough late-2007).
QBE’s stock rose gradually over 2009 as the market noted the company boasts strong businesses and a robust balance sheet, with the substantial majority of its products and businesses producing returns above its 15% minimum return on equity (ROE) requirement.
QBE even felt robust enough to seek out M&A opportunities, in late July 2009 confirming it had acquired 75% of Elder’s insurance unit.
Finally buckling under pressure
QBE’s stock was starting to fall coming into 2010, and in February the company confirmed the market’s worst fears.
QBE reported disappointing FY09 results on 26 February, with net profit up only 6% to $1.97 billion.
The average analyst forecast was for a net profit of $2.01 billion.
Breaking down the result, QBE saw insurance premium rates rise 4%, yet its insurance profit margin declined to 17%, from 19.7% a year earlier. This was at the lower end of its guidance of between 17% and 18%.
QBE declared a final dividend of 66 cents, bringing the total 2009 dividend to $1.28 per share.
At the time, QBE provided guidance for an insurance margin of 16% to 18% for FY10, and forecast its net earned premium to grow 3%.
With almost 80% of its earnings being generated offshore, QBE cited a strong Aussie dollar as a threat to FY10 earnings.
QBE forecast continuing difficult conditions for the global insurance industry in 2010.
Catastrophe strikes
In late April, QBE advised that its estimated large risk and catastrophe claims for 2010 have so far totalled $470 million.
For comparison, QBE’s large risk claims totalled $410 million at the same point in 2009.
QBE set aside $1.28 billion for large risk and catastrophe claims in 2010, so it still has a buffer of around $810 million for the remainder of the year.
This is a decent enough result given the unusually high number of catastrophes that have occurred so far in 2010, though the fact remains that these catastrophes have taken a large chunk out of QBE’s piggy bank.
Downgrade doldrums
On Monday, QBE warned that it expects 1H10 net profit to fall by about 40% on-year, primarily due to lower investment income.
More worrying is that QBE downgraded its insurance margin guidance to 15.7% in the half, which was below its target range of 16% – 18%, and last year’s result of 17.5%.
QBE attributed the downgrade to lower risk free rates used to discount the outstanding claims in the last few weeks of June.
QBE maintained its interim dividend at 62 cents, but it wasn’t enough to prevent a 5.6% slide in its share price on the day of the announcement.
Outlook
QBE’s new downgraded 1H10 outlook is disappointing and foreshadows a tough time for global insurers in the coming year.
The company has forecast 1H10 net profit to fall around 40% on-year and has downgraded its insurance margin guidance to 15.7% in the half, below the prior year’s half result.
Yesterday saw QBE’s peer Insurance Australia Group (IAG) confirming it expects to report a 50% drop in FY10 net profit to $91 million, from last year’s $181 million.
IAG stated that that profit and insurance margin were affected by substantial losses in its UK business, and like QBE the company has been hit by natural peril claim costs.
QBE is also facing difficulty on another front, noting that a strong Aussie dollar is a threat to FY10 earnings as it earns almost 80% of its earnings offshore. Our dollar has been stronger in recent weeks and is now sitting at around 90 US cents.
Looking ahead, QBE forecasts continuing difficult conditions for the global insurance industry in 2010.
Having said that, we feel the stock has already been significantly punished and may start to find its feet around current levels.
QBE looks cheap on a P/E basis following recent share price weakness; it is only trading at 9.0 times current P/E and 11 times forward P/E, which is at a considerable discount to the market and domestic insurance peers. IAG and SUN are trading at current P/E of 35 and 25 times respectively.
The company looks cheap on fundamentals, which should make it attractive for investors with a long term view; however we expect QBE to continue to face margin pressure in the near term.
The Australian share price for QBE has dwindled down from above $25.00 to around $16.50. It last closed 3.2% down to settle at $16.43 a share.
