One always has to worry when a long standing CEO exits a company. Think of Alan Moss at Macquarie or Wal King at Leighton. QBE’s Frank O’Halloran has stepped down after reporting a 45 per cent plunge in profit following a series of catastrophic natural disasters. But he did turn QBE into a global player and there are questions. The company will raise $600m of equity through an institutional & retail share offer, which suggests there are looming risks.
Merrill, which has a price tagret of $13.50 and a buy, has this to say:
The company points towards risks around future regulatory non eligibility of some of its current sub-debt as causal. We think it more likely reflects the weak balance sheet, with debt above target levels for the current credit rating, solvency at an all time low of 27%, the MCR right at QBE’s minimum target and reserving ratios still under pressure from falling discount rates. We think investors may have rewarded QBE more if it had of fully put the issue to bed and raised $500m more than it plans to.
QBE has been a successful global player in the global general insurance and re-insurance industry; it only a minor blemish on
September 11, 2001. It is a global success story, just like Macquarie was for a while, mainly by using diversification to manage risk pretty effectively and canny acquisition. The problem is that insurers are exposed to systemic risk about which they can do little. The spread just does not work as well as it used to and maybe we are getting a glimpse of the future. Merrill again:
The disappointment surrounding FY11 cannot be erased. The causes are well documented. Group NPAT fell 45% from US$1,278m to US$704m at the mid-point of guidance US$640m-765m. This is some relief to battered shareholders. A number at the low end would have added insult to quite severe injury. Final dividend is 25¢ 25% franked. Directors have decided future dividend policy should be a payout of up to 70% of reported NPAT. This will enable capital to be retained for growth while maintaining capital adequacy levels to meet more stringent requirements of regulators and rating agencies.
Merrill’s buy is based on valuation appeal, with 8x and 1.1x forward book. Deutsche only has a hold and a lower price target of $12.80.
Overall, whilst earnings and capital should move in the right direction in 2012, we believe investors will wait for delivery, particularly given leadership changes and APRA capital uncertainty.
Indeed yes, that is the rub. The QLMI subsidiary is a black box and distinctly exposed to any Australian housing correction with questionable capital ratios. As Banking Day pointed out this morning, the only update of any substance in yesterday’s numbers was:
QBE has forecast gross written premium for its lenders’ mortgage insurance business of A$300 million for the calendar year 2012. This nugget is the only piece of financial data relating to the LMI business disclosed by QBE Insurance Group in its 2011 financial results, which were released yesterday. The 2011 gross written premium for QBE LMI is yet to be disclosed. According to APRA data, QBE LMI reported gross premium revenue in the year to December 2010 of $362 million.
With a Genworth float in the offing, pressure is sure to increase for greater disclosure.
A lot has to be proved by the new CEO John Neal, and that task is not sufficiently well reflected in the broker views.