new thread to a previous question

I've started a new thread to a question from Hunini. "Any idea's why its under pressure?".

Hunini,
The $A appreciating is spooking investors into thinking that the business will suffer. The continued talk of flat yields in the U.S. would be adding to this. QBE fix their terms over 3-6 month periods and would be doing this incrementally and in blocks, to smooth out large variances. QBE has factored in a full year rate of 3% for its complete business, but their is a big asterix for that.

Now for the people who own QBE for the medium term.

For the first half of this year, QBE moved reporting to $US because the overseas institutions make up nearly 70% of the register. The insto's were finding it difficult to work the numbers because of the variance in the $A exchange rate and then having to work the numbers back to $US after QBE had already worked them back to $A, confused? so we're they.

The main issue I would like to point out is that posters are missing the business itself. QBE's GWP figures are forecast to be $13.5b which is 20% higher than last year (in $US terms) and they have re-affirmed a margin of 16-18% (which is world class). They are also forecasting increased premium rates of 2-3%. But everyone is focussing on rates and currency, something that QBE has very little control over.

Debt is currently at 35% and they have tier 2 borrowing capacity of $1.2b, so they can write a cheque for anything up to that mark.

I know management would have been incredibly disappointed in missing the insurance margin by a whisker, but I'm sure they would be working hard on it for the second half. Just with the reported first half year margin, on the 16th June the insurance margin was 16.2% a month prior it was 17.3%, but really, its only reported numbers on a particular day, the underlying business is making enormous amounts of money, you only need look at the free cashflow number of $US647m in 6 months compared to the previous year of US$564m.

Now with $A appreciating comes two benefits.
Benefit 1.
QBE can buy a US acquisition for less money in aussie dollar terms, but the new QBE reporting is in $US, so we'll call that even. They are required to hold their liabilities in that currency, but what it does give them is an opportunity to borrow in the same jurisdiction. Why do you think they are knocking down doors of other insurers in the US? They have just arranged borrowing capacity at 2.5% above the Libor rate, which at the moment is stuff all. I've seen it written on HC that QBE will look into Asia, middle east etc. They wont, they are focussed on the US, that's where the bargains are and they are a top 10 player with scale and infrastructure. Their criteria for any bolt-on, is simple. If it makes money in its first year, can use existing QBE infrastructure, the re-insurance contracts can be amended to fall under QBE's banner, management stay on and KPI's can be met over the first 12 months, then they will write the cheque.

Benefit 2.
Blind freddy can tell you that Australian rates are heading up with the $A appreciation. They are factoring in a 80% chance of a .25% in November. Any excess capital that is currently overseas will be sent back to gain the 6%+ that our banks will be paying. Now who do you think is one of Westpac's biggest clients? We all know that big deals are done by the big players in any organisation, sometimes over a coffee, but could you imagine the conversation Big Frank would be having with Gail Kelly? "What rate are you going to give me for $1bn"?

Goes back to my early point about interest rates. QBE have forecast 3%, but 22% of the $13.5b funds are aussie denominated with rates increasing and excess capital will be flowing back to Australia, so will they reach the mark of 3% when it fell short at 2.75% on June 30? Well, it was 4.2% on April 15. I'm guessing a mark near this on increased premium, giving you a margin of 16.8%+. If QBE have a benign catastrophe level for the next 13 weeks is it possible it could be higher? Remember, the worst event to happen to this year was the Perth storms and that crimped $107m from the bottom line.

As for the current share price.
Yeah, doesnt thrill me being down in the $17's and I wont go into the short selling aspect, but do you think QBE's now biggest shareholder the worldwide giant - Aberdeen Asset Management are worried with their holding of 10.5% worth $1.9b? They've increased their stake three times in 4 months.
How about Credit Suisse on behalf of other super funds with 9% worth $1.1b odd?

They would be having monthly meetings with the big man and if they were worried, they'd be selling.

Pep