QBE

By Jason Fittler

QBE Insurance Group is an Australian-based non-life insurer writing both general insurance and reinsurance business.

The company operates in Australia, Asia/Pacific, North America and Europe. QBE is a major player in the Lloyd's insurance market. The company's strategy remains growth by acquisitions and diversification by geography and product category.

In our view, QBE is now looking oversold as we head into the first half 2010 result. We appreciate that the result is likely to be unfavourable, however, we have priced this into the stock. Based on our analysis of PE, PE relative and dividend yield, we believe that QBE is looking good value at $17.25.

The main catalyst for QBE appears to be a trifecta of;
1.    an improving US economy,
2.    rising global interest rates and
3.    a strengthening Australian Dollar.

While these catalysts may not materialise for another six months, we believe that investors will be rewarded for investing in QBE today.

QBE has continued to underperform the ASX All Ordinaries over the past three months as well as the domestic general insurers. QBE is now down 17% over the last three months versus the All Ordinaries down 11%, IAG down 13% and SUN down 9%. This is despite IAG coming out with an A$365m downgrade to earnings due to an increase to its UK claims reserves.

In our view, this underperformance seems excessive.

The current dividend yield of 7% is well above its historical dividend of 4.0% of the past 10 years. Even if we take a more normalised payout ratio of 70%, this would still represent a dividend yield of 6.0%. For value investors that are looking for a healthy yield, we believe that this creates a compelling valuation proposition.

In our view, QBE's track record in underwriting and acquisition execution remains strong. Furthermore, the company retains a strong balance sheet with about A$1bn of debt capacity
available for acquisitions.

While QBE faces various headwinds in 2010, we believe the valuation appeal is now just too compelling.

For more information on QBE please call us on 07 4771 4577.