consistent underperformer, page-7

Macquarie: QBE - Set to Deliver Strong Result on Monday
16/08/2007

QBE will report its 1H07 result on Monday 20 August. Macquarie Research Equities (MRE) expects the company to deliver a strong profit up 45% on last year, and with a $35.53ps price target (based on a long-term insurance margin assumption of 12%), MRE believe that QBE represents attractive buying at current levels.

MRE expect the company to report NPAT of $856m (consensus of $829m), up 45% on the pcp and generating an ROE of 23.8%, underpinned by:

Advertisement

• An 18% lift in GWP to $6.68bn, with ~60% of the growth driven by the recent US acquisitions of Praetorian and Winterthur US.
• Further improvement in the insurance margin to 19.2% from 18.7% in the pcp (FY07 guidance is 17.5–18.5%), reflecting favourable YTD catastrophe experience, higher interest yields on technical reserves and the positive impact of rising bond yields on prudential margins. A significant increase in investment income on capital due to stronger equity markets.

Reflecting recent profit growth and balance sheet strength, an interim dividend of 55cps is expected (consensus: 51cps), up 38% from 40cps in the pcp, consistent with management’s desire to yield ~3.75–4%.

QBE should deliver a strong result, with the global pricing cycle softening only gradually (on average across all classes and regions) and catastrophe claims experience (frequency and severity) thought to be better than the pcp.

Post result commentary is again likely to alleviate fears of substantial price competition across the global portfolio with YTD price movements not expected to differ materially from management guidance (down 3%) and needing to be considered in light of underlying claims frequency.

Headline premium and reported NPAT will, however, be negatively impacted by recent A$ appreciation, with a 1% movement in the A$ expected to impact NPAT by around $10m. Macquarie has booked a $50m charge to FY07E NPAT reflecting the estimated ~5% YTD appreciation of the $A.

That said, the estimated $50m YTD adverse currency impact is expected to be more than offset by strong equity returns and an asset-liability mismatch gain given QBE’s short duration asset position.

Action and recommendation
No change to MRE’s Outperform recommendation. QBE remains MRE’s preferred GI sector exposure. A strong result coupled with a likely upgrade to FY07 margin guidance and calming commentary regarding the extent of rate softening (Swiss Re’s recent 2Q07 result pointed to only 2% rate reductions in the June-July renewals) should put QBE back on the straight and narrow after a typically skittish share price performance during the pre-result blackout. With a $35.53ps price target (based on a long-term insurance margin assumption of 12%), QBE represents attractive buying at current levels.