The thing that worries me is that even with such a massive reduction in the business's valuation, there is absolutely no speculation that private equity or a large US / global insurer is even thinking it is an opportunistic M&A play. Having watched the share price fall as much as it has over the past 5 years, it really makes me scratch my head as to whether the company is still overvalued given there is not so much as a bit of noise regarding M&A. I mean, even Qantas was spoken about as an MBO / takeover play not so long ago...
QBE - QBE Insurance Group
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Julia
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Despite the continued fall over now more than six years, all through this period various 'experts' have insisted that QBE is a Buy, that it's a 'very well managed company' etc etc.
Yeah, right.
Meantime, IAG, after falling in the GFC has moved into a decent uptrend and is almost back to its pre-GFC high.
It has a far better grossed up dividend also. Even SUN would be a far better option than QBE.
Yeah, right.
Meantime, IAG, after falling in the GFC has moved into a decent uptrend and is almost back to its pre-GFC high.
It has a far better grossed up dividend also. Even SUN would be a far better option than QBE.
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my feeling is that, as all insurers, they are strongly linked to interest rates and as long as rates remain low, they will not make much profit , if any;
plus by their nature they cop it bad after every cyclone/hurricane etc so the long term view in a global warming world is not that great;
so in a nutshell, why would you want to invest in QBE: if you want to invest in USD, go forex or buy Apple
my worthless 1/2 c view on QBE, I do not own currently, and I always match my play with option when I trade it
plus by their nature they cop it bad after every cyclone/hurricane etc so the long term view in a global warming world is not that great;
so in a nutshell, why would you want to invest in QBE: if you want to invest in USD, go forex or buy Apple
my worthless 1/2 c view on QBE, I do not own currently, and I always match my play with option when I trade it
I agree. There underwriting business (premiums less claims) is generally eroded by competition to the point where it is low or zero margin with downside risk if major disasters occur. The upside in earnings is how they invest their free float (ie the premiums they take from customers prior to needing to fund any claims). QBE invests the free float in mainly highly rated bonds and notes which provide very low returns. Berkshire Hathaway has made a fantastic business out of investing its free float in a diverse array of businesses which keep returns reasonably high while keeping volatility low.
Until rates go up, QBE will continue to be prone to downgrades.
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This downgrade was related to inadequate claims reserving. This seems to have been a theme since 2008. In the years before they tended to overestimate claims and wind them back in subsequent periods, since then they've been doing the opposite. The interest rate story is true, but in reality, if you're running an insurance company the main game is estimating how much you take in v how much you pay out and pricing accordingly.
Note 21(e) FY13 report.
DeepState
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Having a shot at valuing QBE:
Company's carrying value as sum of parts via 2013 report, tested for impairment as at Sept 2013 suggests AUD12.52. Roughly, this is what the company thinks it is worth.
The accounts are close to a NAV valuation. If no further impairment to assets are assumed, beyond those just announced, the break-up value is AUD$9. If we assume USD$2.250bn of USD$4.48bn of intangible assets are written down, the break up value is AUD$7.10.
If the after tax underwriting profit from 2013 is used as a base and discounted at 7% (essentially assuming premiums grow a little above inflation which is well below historical), a valuation of AUD$11.52 is developed if no impairment of intangibles is encountered.
At the other end, if we assume no premium growth but just assume that it perpetuates and take the impaired balance sheet, a value of AUD$8.85 is developed. This is a tough scenario. It would require multiples of the latest development to achieve and makes no allowance for a buffer of goodwill not on balance sheet which has been accrued.
The figures include a risk margin built into the claims reserves. This is pretty big and would be expected to be released as the claims run off. This is worth AUD$1.31.
The stock is probably trading cheap by around 20% or so, probably a margin more if top line growth can be expected to exceed inflation by a greater margin than factored in here - but let's leave that for another day. A potential deep value turnaround for some. After the experiences with the writedowns of prior acquisitions, the buy to grow strategy might be taking a rest for a while so no adjustment is made for that.
In relation to interest rates, QBE runs a pretty well matched balance sheet which is quite insensitive to interest rate movements. Lower rates do affect the insurance profit, but, over time, return on capital considerations balance these out as the insurance cycle moves around.
Disclosure: Holder of QBE, SUN, IAG
Company's carrying value as sum of parts via 2013 report, tested for impairment as at Sept 2013 suggests AUD12.52. Roughly, this is what the company thinks it is worth.
The accounts are close to a NAV valuation. If no further impairment to assets are assumed, beyond those just announced, the break-up value is AUD$9. If we assume USD$2.250bn of USD$4.48bn of intangible assets are written down, the break up value is AUD$7.10.
If the after tax underwriting profit from 2013 is used as a base and discounted at 7% (essentially assuming premiums grow a little above inflation which is well below historical), a valuation of AUD$11.52 is developed if no impairment of intangibles is encountered.
At the other end, if we assume no premium growth but just assume that it perpetuates and take the impaired balance sheet, a value of AUD$8.85 is developed. This is a tough scenario. It would require multiples of the latest development to achieve and makes no allowance for a buffer of goodwill not on balance sheet which has been accrued.
The figures include a risk margin built into the claims reserves. This is pretty big and would be expected to be released as the claims run off. This is worth AUD$1.31.
The stock is probably trading cheap by around 20% or so, probably a margin more if top line growth can be expected to exceed inflation by a greater margin than factored in here - but let's leave that for another day. A potential deep value turnaround for some. After the experiences with the writedowns of prior acquisitions, the buy to grow strategy might be taking a rest for a while so no adjustment is made for that.
In relation to interest rates, QBE runs a pretty well matched balance sheet which is quite insensitive to interest rate movements. Lower rates do affect the insurance profit, but, over time, return on capital considerations balance these out as the insurance cycle moves around.
Disclosure: Holder of QBE, SUN, IAG
Hi Retired Young
I must admit I am not familiar enough with insurance company valuation to fully understand your analysis, so apologies if this question is misinformed - if there is a deep underlying discount to the company's value then I would have expected that to put a floor on the price as suitors may be sniffing around to buy the business? It seems like a bite size purchase for the large global players and ripe for a break up by private equity... As long as the valuation is well higher than where it is trading.
There seems to be plenty of buyers around $10 so maybe that is where it hits compelling value as per your post?
I must admit I am not familiar enough with insurance company valuation to fully understand your analysis, so apologies if this question is misinformed - if there is a deep underlying discount to the company's value then I would have expected that to put a floor on the price as suitors may be sniffing around to buy the business? It seems like a bite size purchase for the large global players and ripe for a break up by private equity... As long as the valuation is well higher than where it is trading.
There seems to be plenty of buyers around $10 so maybe that is where it hits compelling value as per your post?
DeepState
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I don't understand my own analysis. How could you?
This company can be reasonably accurately valued given a set of information although surprises to the information do happen. Given this, I would be shocked if the investment banks were not running the ruler over QBE and talking to PE or trade buyers. Both make sense for different reasons. QBE grew substantively by acquisition over the tenure of O'Halloran. They don't even know how may of these things he bought because you can't get an accurate number on this. Amazing. Anyhow, these businesses are still not well integrated so the firm can be considered as a holding company of subsidiaries which are more independent than would be the case under a well integrated company. The writedown of the US assets and now LatAM assets highlights that senior management and the board are not across the information. Whilst the ostensible wording from them suggests that they are committed to organic growth, I think the market would react favourably to a reduction in the complexity of the portfolio.
$10 is a round number and price action around round numbers is weird. If it punches through $10, it can go quite a bit further. Personally, I don't care. The value of the stock is likely north of $12 and this represents a margin of safety that is pretty reasonable. A break up to tangible value is outside the scope of reasonableness. I do not know definitively what will close the gap. Certainly, management is not helping in that endeavor although they inherited a clusterf.... The Argentina business was acquired six months prior to O'Halloran's retirement and incurred a $50m writedown into the 2013 accounts! O...M...G. Maybe PE might narrow the gap....heck it would. The key issue is that they would need to pay a healthy premium to holders to take it out even via Scheme. I do not know what kind of cost-out or synergy extraction they can conjure. It's not like QBE is running that fat. What's left after that? So it's probably at the border of a buy-out/take-private.
Thoughts on cap raising?
They are IPOing their mortgage insurance business which is a step in the right direction (for me) of focusing their operations and stripping off some of the crap that Frank acquired in his final days at the helm. A bit more financial engineering would likely allow better focus for each aspect of the business and be more attractive takeover targets as well.
I don't hold and won't buy yet but some parts of the business are fantastic (Aust & NZ operations with 86.9 combined operating ratio).
They are IPOing their mortgage insurance business which is a step in the right direction (for me) of focusing their operations and stripping off some of the crap that Frank acquired in his final days at the helm. A bit more financial engineering would likely allow better focus for each aspect of the business and be more attractive takeover targets as well.
I don't hold and won't buy yet but some parts of the business are fantastic (Aust & NZ operations with 86.9 combined operating ratio).
skc
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depend what the market do do it when it open
I am likely to buy in... I see a beginning of a turn around could take a few years but I can wait
The only insurance business unloved and abandon by the market
Agree. I think the market will see the raising very positively. They have had a string of shocking results and rumour of the cap raising persisted through all this time. The fact that they are only going to the market now implies that they think the coast is cleared... finally.
QBE has done a complete 180 role reversal with IAG as per this AFR story.
http://www.afr.com/p/business/chanticleer/qbe_iag_tale_of_two_companies_H5u5ewgqdySKrRqqegCcZM
It has the set up of a perfect contrarian buy.
and the sad thing is I bet you it goes up when it open, market seems wanting to push this guy higher for a while but the linger of capital raising and business structure hold them back.
with this out of the way I think they clear some air for a run ... and the de-merger of the LMI business is a great move, market will like that
No mention here of the share purchase plan QBE are currently offering. Buy in, sell Oct 1st and pocket the profit!
http://www.group.qbe.com/sites/default/files/Default%20Media/ASX%20Announcement%20-%20QBE%20lodges%20pro%20forma%20docs%20for%20SPP%20-%20FOR%20ASX_1.pdf
http://www.group.qbe.com/sites/default/files/Default%20Media/ASX%20Announcement%20-%20QBE%20lodges%20pro%20forma%20docs%20for%20SPP%20-%20FOR%20ASX_1.pdf
you got to be already on the register when they announce the CR to benefit
so only benefits existing holder but why would you want to sell early if you know the
wheel is turning? it could be $20 in a few years ... just guessing it may or may not just figure of speech.
and it is likely to be massively scale back so unless you hold several hundred of thousand worth of QBE stocks you unlikely to benefit much
so only benefits existing holder but why would you want to sell early if you know the
wheel is turning? it could be $20 in a few years ... just guessing it may or may not just figure of speech.
and it is likely to be massively scale back so unless you hold several hundred of thousand worth of QBE stocks you unlikely to benefit much
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I think that's a little bit of an upgrade for debt financing.
I think that sounds quite reasonable and yeh good.
Share price -5% Let me see 2+2 = -1
OK.
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Seems like today is the penny drop for those in QBE expecting US rate rises. Suddenly they seem a little further away....and QBE to stagnate for another few months until the hopes re-ignite.
With that said it has got decent support at current levels...
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US bond yields have risen dramatically since the very strong job report...perhaps its finally time for poor QBE, as it looks to breakout a little of its downtrend 
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Thought this may have taken a bit of a beating today!
Not so, so far!
Not so, so far!
QBE - strong buy vs. strong sell
I was doing some reading up on QBE.AX today, and was stricken by differences in opinions: here https://au.finance.yahoo.com/q/ao?s=QBE.AX 15 analysts converge around buy/strong buy whereas here http://www.barchart.com/opinions/stocks/QBE.AX a dozen indicators unanimously scream SELL.
In addition to your opinions on QBE.AX, I would really love to hear your comments on how to interpret such discrepancies. Ideas?
I was doing some reading up on QBE.AX today, and was stricken by differences in opinions: here https://au.finance.yahoo.com/q/ao?s=QBE.AX 15 analysts converge around buy/strong buy whereas here http://www.barchart.com/opinions/stocks/QBE.AX a dozen indicators unanimously scream SELL.
In addition to your opinions on QBE.AX, I would really love to hear your comments on how to interpret such discrepancies. Ideas?
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