##{"id":60886,"date":"2012-11-13T12:34:28","date_gmt":"2012-11-13T01:34:28","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/11\/13\/brokers-cautious-on-qbe\/"},"modified":"2012-11-13T12:34:28","modified_gmt":"2012-11-13T01:34:28","slug":"brokers-cautious-on-qbe","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/11\/13\/brokers-cautious-on-qbe\/","title":{"rendered":"Brokers Cautious On QBE"},"content":{"rendered":"

\n\t – QBE<\/span> Insurance lowers full year earnings guidance
\n\t – Company has strengthened its balance sheet
\n\t – Less clarity with respect to margin outlook
\n\t <\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tTo reflect the impact of hurricane Sandy and a number of claim increases, QBE<\/span> Insurance ((QBE<\/span>)) yesterday downgraded earnings guidance for 2012. The lowering of earnings reflects a cut to insurance margins to 8% from 12%.<\/p>\n

\n\tThis has prompted reductions to earnings forecasts across the market, with UBS lowering its profit estimate for the full year by 42% and Citi<\/span> by 31%. Changes to estimates for later years have been smaller, the reductions ranging from around 1-6%. Consensus earnings per share (EPS) estimates for QBE<\/span> Insurance according to the FNArena<\/span> database now stand at US106.2c for 2012 and US131.5c for 2013.<\/p>\n

\n\tWhile hurricane Sandy contributed to the downgrade to earnings, Citi<\/span> suggests the disaster is also being used as an excuse to further strengthen QBE's<\/span> balance sheet. As Citi<\/span> points out, adverse prior year adjustments of around US$380 million also contributed to the revision in guidance, while the update indicated risk margins have also been strengthened by US$125 million.<\/p>\n

\n\tGiven none of the adjustments undertaken by QBE<\/span> provide any additional cover for the difference between inflation and interest rates, Citi<\/span> suggests the balance sheet strengthening being undertaken now is unlikely to be the last for the group.<\/p>\n

\n\tFor Credit Suisse, the primary issue with the downgrade to guidance from QBE<\/span> is an increase in claims provisions for the North American run-off portfolio, as this adds to the risk of further top-ups going forward.<\/p>\n

\n\tA positive noted by Credit Suisse is that the update indicates the company's core business remains in good shape, while the broker also takes the view QBE's<\/span> balance sheet remains in a relatively solid condition.<\/p>\n

\n\tBA Merrill Lynch doesn't exactly agree, the broker arguing the update indicates QBE<\/span> will need to do further work to improve the state of its balance sheet given anticipated reserve risks are now materialising<\/span>. The other point made by BA-ML is that with catastrophe losses above budget thanks to Sandy there is now limited capacity for QBE<\/span> to deliver any positive earnings surprise.<\/p>\n

\n\tFor BA-ML this is enough for the broker to retain a Neutral rating, with price target cut to $12.80 from $14.00. Price targets elsewhere have also come down, UBS lowering its target to $12.50 from $14.50 and Credit Suisse to $14.00 from $14.20. The consensus price target for QBE<\/span> according to the FNArena<\/span> database has fallen to $13.64 from $14.06.<\/p>\n

\n\tThe update was enough for UBS to downgrade to a Neutral rating from Buy previously, this as there is now less identifiable upside given reduced clarity with respect to key medium-term margin drivers for QBE<\/span>. The change in UBS's rating leaves QBE<\/span> rated Buy three times and Hold five times. <\/p>\n

\n\tShares in QBE<\/span> today are lower in a weaker overall market and as at 11.45am the stock was down 64c<\/span> at $11.16. This compares to a range over the past year of $9.88 to $14.71. The current share price implies upside of around 20% to the consensus price target in the FNArena<\/span> database.<\/p>\n

\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"