QBE Damage Priced In?
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QBE rose nearly 3% (to $10.09) in yesterday’s weak wider market and all but recapturing the 3.5% slide of Tuesday after the shock blowout in the cost of natural disasters forecast for the year to December.
The insurer’s shares took fell when it announced a $US600 million hit to earnings thanks to higher than allowed for losses associated with hurricanes in the Americas (Irma, Harvey and especially Maria), Cyclone Debbie in Australia and then the two Mexican earthquakes.
Tuesday’s fall added to the downward pressure on QBE shares this from a weak interim result and then management shuffles (including the departure of CEO John Neal and his replacement with former cFO, Pat Regan from the end of this year. Those concerns saw the shares slide 20% year to date, only partly lessened by yesterday’s modest rebound.
Helping was the straw hats in winter approach to investment - buying shares in companies that are out of favour, or which have just suffered a downgrade or worse.
That thinking seems to have been behind the call yesterday from Morgan Stanley analysts say its “time to buy” QBE shares..
Morgan Stanley analysts estimated that Tuesday’s downgrade equates to around a 60% hit to cash earnings for this December 2017 financial year, the MS analysts estimate.
Most brokers expected QBE would struggle to cover its claims via its established reinsurance contracts, but the size of the blowout "surprised", the analysts write.
The company earned $422 million in the first half and paid a 22 cents a share interim to shareholders. It has a policy of paying dividends based on a 60% share of cash earnings. They will essentially be the interim earnings and the interim payout will likely become the full year payment.
Given the expected losses, Morgan Stanley analysts agree and do not expect QBE to pay a dividend for this half. But with a solid capital position, “the ($A1 billion, three year) buy-back likely resume,” they added.
The analysts upgraded QBE to “overweight” because as they write:
“With greater clarity of FY17e earnings,and the market not pricing in FY18e upside from premium hikes, in our view now is the time to buy.”
"With around $US25 billion of investments, QBE's yield on technical reserves and shareholder funds stands to benefit from rising yields."
On a estimated price earnings ratio for next year of 9.7, a price-to-book ratio of 0.9 and a 6.7% dividend yield, the valuation is “compelling”, they say, with the market pricing in all of the downside and none of the potential upside.
But we have to get through another Australian summer, with storms, drought, possible heavy rain and floods, cyclones and strong winds, as well as the lingering impact of the costs of the big North American disasters.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.