QBE - Now fully valued (BS aside)

Interesting valuation from the AFR Chanticleer column this morning.

Might make a few question whether this one is going to far back up in the short term even if there ISN'T anything hiding in the woodshed.



As a tax-loss sale stock, QBE is close to perfection given its 52-week high of $11.81 a share and a world equity market spooked by terrorism among other fears.

This partly explains why the company had to issue a reassuring statement to the market yesterday when its stock price hit a low of $6.05 a share before rallying to close up at $6.72 a share.

But as chief Frank O'Halloran and finance boss Neil Drabsch do the luncheon run with Goldman Sachs on Friday in Sydney and with Merrill Lynch next week in Melbourne, some more fundamental questions may be asked.

As a virtual one-of-its-kind in the Australian market and, pre-September 11, having an apparently pristine record, QBE has been afforded market-darling status.

But a recent report from UBS Warburg, comparing the company with two Bermuda-based general-reinsurance companies with large presences at Lloyds, ACE Ltd and XL Capital, puts QBE in a different light.

In short, O'Halloran is running a company, according to UBS, that has a high-risk profile without a demonstrable return-on-equity outperformance to justify any premium market rating.

Some figures tell the story, starting with an average return on equity from 1997 to 2001 of 10.3 per cent for QBE, 11.3 per cent for ACE and 8.3 per cent for XL.

QBE's solvency as measured by net tangible assets divided by net earned premium averaged 49.1 per cent against 169.3 per cent for ACE and 226.3 per cent for XL. The percentage of gross written premium ceded to reinsurance protection averaged 19.4 per cent for QBE, 27.9 per cent at ACE and 24.7 per cent for XL.

Why, it must be asked, did QBE trade - at the time the report was written when the stock was trading at $7.25 a share - at a price-earnings multiple of 11.8 times against 8.4 times for ACE and 11.5 times for XL.

The respective price-to-book and price-to-NTA multiples were 1.7 (QBE), 1.4 (ACE), 2.0 (XL) and 2.1, 2.3 and two times, all suggesting the current market valuations for QBE are a lot closer to the market than the $11.18 a share price a year ago.