With 10 days to go, lets look at how we are looking for June...

With 10 days to go, lets look at how we are looking for June 2013 half year results.

1. Underwriting performance

Major cats to date this year: Tasmania fires, QLD/NSW floods, Rio tinto mine collapse in Utah, tornadoes in Oklahaoma & flooding to Germany/Austria,

Qbe's exposure to these events and other cats over $2.5 million would be no more than $300 million from an allowance of $800 million. So, we are looking at an upside of $500 million subject to the next 10 days being benign.

Investment income should be fairly stable at around 3%.

On this basis, I am looking for a Combined operating ratio (COR) of 89%. With investment income, we should achieve an insurance margin of 14%. This is 3% higher than forecast.


2. Currencies - AUD/US .9180
AUD/UK .5950
AUD/EURO .6950

If this continued to June 30, we are looking at a circa 10% increase to our overseas income in AUD terms from the currency rates as at 31 dec 2012. So,with 75% of our income derived overseas, we are looking at a 7.5% increase to earnings.

3. Risk free rates - US 10 year Govt - 2.38%
AUS 10 year govt - 3.63%
UK 10 year govt - 2.27%

If this continued to June 30, we are looking at a circa 60 point increase in interest rates from rates at 31 dec 12. With a claim allowance of $5 billion this half year, this would equate to a further $30 million discount to future claim provisions which would be shown as increased earnings on the profit & loss.

So, with these assumptions, lets try to work our cash profit, earnings per share & dividends.

At 14% insurance margin on $8 billion net earned 1st half premium,this equates to $1.12 billion.(I actually think we will achieve 15% insurance margin but I am being conservative)

Let's say investment income on shareholders funds and interest expense are roughly the same.

If we apply the currency & risk free rates movement, we are looking at gross profit of $1.2 billion.

At 20% average global tax rate, we are looking at a cash profit of $960 million.

For this exercise,i have left out any amortization expenses.

So 1st half cash net profit at circa $960 million, EPS would equate to 80 cents.

Dividends at 50% cash earnings,would equate to 40 cents per share.

I suspect debt to equity would sit at 41% and MCR at 1.8 times.All at comfortable levels and improving.

In regards to recent share price movements, I would disregard the increased selling pressures over the last 2 weeks. This will stop next week and reverse with the same velocity into buying pressure.

I suspect the the circa 2 to 3 million shares a day being shorted are foreign traders wanting to sell their aussie equities before the Aussie dollar decline and buy back at a lower AUD level.

Convertible share holders would also be adding to current selling pressure as they benefit in more QBE shares with a lower trade weighted share price over the last week. This should finish by tomorrow with these shares issued by the 26th June 2013.

All in all, with US crop prices and yields holding up to forecasts and a recent uptick in foreclosures as banks feel more confident selling off non performing property loans in a rising property market, Qbe's US business should be heading to a profitable year. This was the major drag on earnings last year.

I suspect the market update webcast planned by Qbe on the 2nd July will signal to the market that they will outperform current consensus forecast.

I have a 30 day target of $18.