Australia | Nov 13 2012
– QBE Insurance lowers full year earnings guidance
– Company has strengthened its balance sheet
– Less clarity with respect to margin outlook
By Chris Shaw
To reflect the impact of hurricane Sandy and a number of claim increases, QBE Insurance ((QBE)) yesterday downgraded earnings guidance for 2012. The lowering of earnings reflects a cut to insurance margins to 8% from 12%.
This has prompted reductions to earnings forecasts across the market, with UBS lowering its profit estimate for the full year by 42% and Citi by 31%. Changes to estimates for later years have been smaller, the reductions ranging from around 1-6%. Consensus earnings per share (EPS) estimates for QBE Insurance according to the FNArena database now stand at US106.2c for 2012 and US131.5c for 2013.
While hurricane Sandy contributed to the downgrade to earnings, Citi suggests the disaster is also being used as an excuse to further strengthen QBE's balance sheet. As Citi points out, adverse prior year adjustments of around US$380 million also contributed to the revision in guidance, while the update indicated risk margins have also been strengthened by US$125 million.
Given none of the adjustments undertaken by QBE provide any additional cover for the difference between inflation and interest rates, Citi suggests the balance sheet strengthening being undertaken now is unlikely to be the last for the group.
For Credit Suisse, the primary issue with the downgrade to guidance from QBE is an increase in claims provisions for the North American run-off portfolio, as this adds to the risk of further top-ups going forward.
A positive noted by Credit Suisse is that the update indicates the company's core business remains in good shape, while the broker also takes the view QBE's balance sheet remains in a relatively solid condition.
BA Merrill Lynch doesn't exactly agree, the broker arguing the update indicates QBE will need to do further work to improve the state of its balance sheet given anticipated reserve risks are now materialising. The other point made by BA-ML is that with catastrophe losses above budget thanks to Sandy there is now limited capacity for QBE to deliver any positive earnings surprise.
For BA-ML this is enough for the broker to retain a Neutral rating, with price target cut to $12.80 from $14.00. Price targets elsewhere have also come down, UBS lowering its target to $12.50 from $14.50 and Credit Suisse to $14.00 from $14.20. The consensus price target for QBE according to the FNArena database has fallen to $13.64 from $14.06.
The update was enough for UBS to downgrade to a Neutral rating from Buy previously, this as there is now less identifiable upside given reduced clarity with respect to key medium-term margin drivers for QBE. The change in UBS's rating leaves QBE rated Buy three times and Hold five times.
Shares in QBE today are lower in a weaker overall market and as at 11.45am the stock was down 64c at $11.16. This compares to a range over the past year of $9.88 to $14.71. The current share price implies upside of around 20% to the consensus price target in the FNArena database.
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