A couple of take on QBE’s shocker yesterday for you below. Mac Bank is dour: From Mac Bank:
- FY14 management target downgraded: QBE’s preliminary FY14 margin target of 10% (MRE previous forecast 12.5%) on “slightly contracting” NEP growth is ~25% below MRE’s previous forecast.
- QBE North America ongoing problems the root cause:
- 1) US P&C and Program Business: a further $300m for prior accident year claims development relating to Workers Comp, General Liability and Construction Defects risks as actuaries strengthen claims estimates.
- 2) US Crop 11% increase in claims to 99% COR: unexpected following US competitor’s 3Q13 results and previous QBE commentary. Downgraded due to materially lower crop prices driving revenue claims combined with early season preventative planting claims eroding the deductible.
- 3) US FPS (Lenders Placed): $150m restructuring charge to “right size the business”, $330m write down of all remaining intangibles, $800m FY14 GWP is 17% below FY13. QBE forecast break even in FY14.
- $600m goodwill & $330m intangibles write down appears light compared to $2,354m North America goodwill at Dec 2012.
- Other PY development: QBE has charged $170m for prior accident year claims ($100m for Argentina, $70m for other) in addition to the $300m noted above. This adds to ~$700m charges since August 2012. We do not have any visibility that reserving issues are behind QBE. Reserving adequacy is to be increased to 90% or more by adding $200m to risk margins.
- Underlying conditions not enough to support profitability: Catastrophes ahead of budget by ~$300m actually support the 6% FY13 margin target.
- Dividend and Capital: No change to 50% payout ratio for 2H13. Regulatory and rating agency capital expected to remain above benchmark levels. Earnings and target price revision
- EPS changes: CY13 -26%, CY14 -28%, CY15 -26%. TP -23% to $13.20. Price catalyst
- Downgrade to Underperform. Despite apparent fundamental valuation support and potentially positive macro conditions (higher interest rates, lower AUD) we have insufficient visibility on the earnings outlook. The potential for material variation from current forecasts is high. Despite the share price reaction the forward PER has not de-rated to reflect this earnings uncertainty.
And Nomura is less negative:
Painful round of earnings surprises, but we see value at current level
While disappointed by the negative earnings surprises QBE announced earlier today (totalling some US$1.4bn on a net basis), we believe the stock’s large intraday move (falling 22%) has created some breathing room to our (now significantly rebased) expectations. Management credibility will undoubtedly take time to recover but in the meantime we see QBE’s macro positioning and underlying earnings power as more than sufficient to view the stock’s current multiple as attractive. At current levels, QBE is offered at 10x FY15 P/E with 6% dividend yield.
Significant earnings downgrades, reducing our TP to A$14.50
We have significantly reduced our earnings (down 25% in FY15/16) and dividend estimates (down 28% in FY15/16) to capture updated guidance and our rebased expectations for the group’s major operating units – particularly the US. Our revised A$14.50 target price offers 21% potential upside from current levels, we retain our Buy rating.
Underlying earnings suggest group still has capacity to perform
Picking through the wreckage of today’s release we estimate QBE will deliver an underlying FY13F insurance margin of 10%. While (again) short of guidance for 11%, we believe management’s FY14F target for a 10% insurance margin is a realistic prospect. Thereafter, we see room for further improvement as the group’s cost-out program takes hold.
Capital implications appear relatively muted
With US$930mn of charges relating to already-excluded capital items, today’s losses appear to have had a relatively modest impact on QBE’s capital ratios. However, we cannot rule out some rating agency action.
I wouldn’t touch QBE anyway owing to its Australian housing exposure and lack of visibility is not a good look.
