?? QBE Lenders Mortgage Insurance (LMI) 2011 statutory accounts released
Although only 2% of Group GWP, QBE LMI contributed ~15% of QBE’s PBT in FY11 and has been contentious given tail risk and significant one-off releases in FY10. One-offs were again evident in 2011 but not on the scale of 2010. Moderation of releases and the patchy economy would suggest LMI profitability could ease from here – in our view largely factored into expectations.
?? Another strong bottom line outcome, albeit with some reserving help
GWP grew to $271m, up 20% on 2010 on the back of “strategic partnerships” in a flat market, however NEP was down 9% due to the lagged earning pattern and a lower level of terminations (refinancings). The combined ratio remained low at 45%, or 61% after stripping out central estimate reserve releases of $30m (similar to $37m in 2010, largely driven by assumption changes). NPAT was A$129m – down from $165.4m in 2010, excluding the $132.8m unearned premium release.
?? QBE LMI profitability could ease over the next couple of years
Despite referring to improved LMI claims ratios in its 2011 Annual Report, stat account commentary flagged higher delinquencies and the negative impact of softer housing markets in specific areas. Continuation of these trends could pose downside to LMI earnings given less scope to further ease reserving assumptions now. As outlined in “First line of defence” 13 Oct 2011, earnings and capital implications from realistic LMI downside scenarios are manageable for QBE.
?? Valuation: Price target unchanged at $14/shr Price target is based on a blend of our PE-based and P/B valuations.
QBE Price at posting:
$14.49 Sentiment: Buy Disclosure: Held
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