QBE Insurance Needs New Acquisitions

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This story features QBE INSURANCE GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: QBE
The company is included in ASX20, ASX50, ASX100, ASX300 and ALL-ORDS

By Chris Shaw

Last week QBE Insurance ((QBE)) walked away from its proposed takeover offer for Insurance Australia Group ((IAG)), commenting it had a number of acquisition opportunities overseas and it would look to international markets rather than continue its chase for what would have been on most broker’s numbers an accretive acquisition domestically.

According to Credit Suisse this had better in fact be the case as without additional acquisitions in the shorter-term the broker suggests the risk is the company does not meet consensus earnings estimates for the current year. It points out in April QBE management indicated it still expected gross written premiums of $13.3 billion for FY08, but this was at an Aussie dollar exchange rate of 90c in US dollar and 40p in the UK pound.

Since then the Australian dollar has risen 6% against the greenback and 10% against the pound and with 75% of the group’s gross written premiums being earned outside Australia this is putting earnings in Australian dollars under pressure in the broker’s view.

As an example the broker estimates at current spot exchange rates the group is only on track to deliver around $12.6 billion in gross written premiums, which is well below its own forecast for the year of $13.7 billion. This suggests there is some downside risk to earnings forecasts in the market. As well CS points out the shares are trading on a much higher multiple than global peers, which means any earnings disappointment is likely to be treated as harshly by the market as was the interim profit result in February.

Supporting this view is the fact US bond yields have fallen and this implies some potential margin pressure, as does the fact insurers globally are reporting increased pressure on premium rates. The broker notes it now sits below market consensus in terms of margin expectations through to FY10.

On the plus side the broker notes the group has available internal funding to acquire a further $1.6-$1.8 billion in net written premiums, so it hasn’t gone so far as to move from its current Neutral rating on the stock especially as the shares remain comfortably below its valuation and price target of $27.50.

The broker’s margin compression argument is similar to that suggested by Merrill Lynch last week when QBE announced they were walking away from the IAG proposal, which in Merrill’s view would bring market attention back on margins and the recent turn (for the worse) in the insurance cycle.

Despite this, Merril Lynch continues to view the stock as a solid long-term proposition at current levels. QBE is therefore rated as Buy. Merrills sees little chance of QBE returning anytime soon for another crack at IAG. JP Morgan is not so convinced and suggests such a return remains possible, though in the meantime, and assuming no other major acquisition proposals, it rates the stock as Neutral.

The FNArena database shows four Buys and four Holds on the stock, with an average price target of $29.03, while Thomson One Analytics shows a median price target of $28.96. Shares in QBE today are weaker in line with the broader market and as at 12.30pm the stock was down 53c or 2.1% at $24.95, which compares to a trading range over the past 12 months of $19.50 to $35.49.

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