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QBE – Quietest hurricane season in 20 years, CBA Global Equities research upgrades.
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QBE – Quietest hurricane season in 20 years, CBA Global Equities research upgrades
2013 has been the quietest hurricane season in 20 years. We have increased our earnings forecasts based on very benign weather to date and the c.50bp lift in long bonds in the US and Australia, which increases the discount rate and lowers future claims cost assumptions.
Benign weather should improve results in the US. 2013 has been a very quiet year for Atlantic hurricanes. So far this year, there have been 12 named storms but just two hurricanes, and no major (Cat 3 or higher) hurricanes. By the middle of October, an average year would result in five hurricanes, so we are running well below average this year. We are largely ex-risk on hurricane season by the end of October. 75% of hurricanes form between August and September. QBE has assumed $1b of cat. costs for the second half of the year, with no hurricanes to date, this looks like a very conservative assumption.
Increasing long bonds should lower claims costs. Each 50bp increase in discount rates adds $167m to earnings via lowered claims costs. QBE normally hedges its assets against inflation expectations, but to date, inflation expectations have remained flat while interest rates have increased. We see this as offering a boost to QBE’s bottom line in the current period.
We have increased our earnings forecasts by 6% this year to $1,059m, and our insurance profit forecasts by 5% to $1.9b, with an 11.4% insurance margin. Our price target is unchanged, but we upgrade to Overweight on recent share price weakness given we have a stronger-than-expected earnings outlook for FY13.
“The above is a summary of the research note which is attached. Please read for the full report.”
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