QBE has come out this week and flagged a possible loss of $250 million.
The fall out has seen the share price fall 30% in the first two days of the announcement.
Research houses have all come out and downgraded their price targets, which are averaging around $13. Prior to this announcement most had QBE in the $20 price range.
The problems center on higher than expected claims for their crop insurance business, a one off write down of $150 million US and poor performance of the North America divisions.
This leaves QBE’s 2013 performance the worst since 911.
With a new CEO in charge and low interest rates QBE will have to be very cautious over the coming years to build up reserves and hope at the same time that they do not see extraordinary claims. Keeping in mind that a one off large natural disaster is not as big of a problem as more frequent smaller natural disasters.
The next issue is the low bond rates.
QBE has large reserves sitting around which are invested in bonds and alike, the income from these reserves are around 7% of the revenue of QBE. With bond rates at all time lows we do not expect to see a pickup in this sector.
When we compare the bond rates to price movement in QBE we find that the two correlate very closely as such I also expect that there will be continued pressure on the price while bonds rates are low. Bond rates are expected to be low for some years.
The 2014 dividend forecast for QBE is $0.70 per share with $0.20 paid in August. After this recent announcement I am concerned with their ability to meet this forecast dividend amount. At the current price it will give QBE a gross yield of 7.6%. If they cut the dividend forecast I expect to see further weakness.
QBE is the 16th largest company in the Australian market. I do not expect that it will fail, the large fund managers will need to hold this company and although they will go underweight for now at some point they will buy back in.
QBE is a buy for those with the right risk profile.
For more information on QBE please contact us on 07 4771 4577.