Invest in local insurers, analysts say

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19 November 2012

Analysts are advising investors to favour local insurers over QBE, following CEO John Neal’s announcement last week of an expected $1.2 billion claims blowout from its US division.

“We have encouraged investors to switch out of QBE [and] into the domestic insurers,” Commonwealth Bank insurance analyst Ross Curran told insuranceNEWS.com.au. “We feel they are really strong and we have a great outlook for them.”

Deutsche Bank analyst Shreyas Patel says his group has “had a hold recommendation on [QBE] for some time, so the view hasn’t really changed in the past 12 months”.

He says domestic insurers “are tracking along quite well, quite in contrast to where QBE sits at the moment. They have much stronger balance sheets and we think their reserves look fairly sound.”

Goldman Sachs analyst Ryan Fisher says in a note to clients that the update by CEO John Neal was “a disappointing update on a number of fronts”.

“Even without [Hurricane] Sandy, large losses would have been higher than the market was expecting. The company is again having to add to its reserves at a time when most peers are still reporting healthy reserve releases.”

Morningstar’s Peter Warnes says QBE’s increase in US claims provisions is part of a “new-broom approach” by Mr Neal, who replaced Frank O’Halloran in August.

“They are taking the opportunity to clean things out during a bad year,” he told insuranceNEWS.com.au.

An unexplained feature of the QBE announcement is a $445 million blowout in large individual claims since June.

Mr Warnes says he suspects a significant number of those claims will come from QBE’s internal reinsurance arm, Equator Re, “where they could be self-insuring”.

While QBE is suffering from the rise in large individual, catastrophe and crop insurance claims, Mr Warnes says it is performing well in the attritional – or smaller – claims area.

“They are doing a good job in managing those claims. Very few companies have attritional claims making up less than 50% of net earned premium but QBE this year will have a four in front of that number [putting it in the 40-49% range].

“We’re still positive [about QBE]; we don’t think the model is broken.”

An analyst who did not want to be named said “it’s not just earnings, it’s a balance sheet issue”.

“The balance sheet is looking quite shaky,” he said. “They can carry on if there’s no more unexpected shocks. They raised capital in February which wasn’t enough, especially because they immediately went out and did a deal with that capital.

“Now they’ve raised debt, which won’t bring down their gearing.”

Mr Warnes says his long-term valuation for QBE shares is $18, but the price will be further pressured by an equity-raising.

“The market thinks it should raise equity… probably between $750 million and $1 billion.”

He believes this would be priced about 10% below current levels of about $11.