QBE Stock Recommendation

QBE have a reiterated Outperform stock recommendation and a 12 month share price target of $27.33 from stock analyst Macquarie Research Equities (MRE). MRE have noted the company's performance on the ASX, having returned over 27 percent versus the 13 percent return for the market. In FY06, MRE have upgraded their earnings forecasts by +10.2%; FY07 +2.7%; and FY08 +2.9%.

Significant allowance for large losses in guidance. At the 1H06 results, QBE revised the group’s FY06 insurance margin guidance up to 17–18% (from 16–17% previously), reflecting higher than expected premium rate increases, improved investment yields and favourable 1H06 global catastrophe experience. MRE estimates that the revised FY06 insurance margin guidance conservatively allowed for at least $200m of incremental global catastrophe losses relative to pcp, which was the costliest year on record for global catastrophes following Hurricane Katrina, Rita and Wilma.

Benign global catastrophe experience. Given benign year-to-date catastrophe experience, QBE is poised to deliver an FY06 insurance margin well above guidance. Recent 3Q results from global reinsurers have highlighted the benign claims environment and statistics from the Insurance Services Office show that 3Q06 had the third lowest level of catastrophic claims activity in the US over the past decade. Accordingly, MRE have revised their FY06 insurance margin forecast to 20.6% from 18.9% and forward year (2007 and 2008) margins up c.0.6% reflecting the assumed deferral of additional risk margins at 12/06 implicit in their revised FY06 forecast.

Even more for a rainy day. As at 30 June 2006, QBE was reserved to a 95.3% confidence interval, which was considered prudent due to historically higher incidence of 2H catastrophes. Given a benign 3Q06 windstorm season, QBE will likely deliver a very strong FY06 result but at the same time maintain its reserving confidence interval at or around 1H06 levels and certainly above the level envisaged by management at the interim result. Average FY06 price increases of 7% coupled with greater than expected year end reserving strength should provide increased comfort regarding the FY07 (and to a lesser degree FY08) margin profile.

In response to benign YTD catastrophe experience, expectations for QBE’s FY06 result are rising. More important than the actual result itself, however, will be pricing in the January renewals. MRE believes the bear case of radical price declines to be overdone with property markets likely to face stiffer competition in 2008. Assuming this to be the case, QBE’s forward year margin outlook remains robust with the risk firmly to the upside.

QBE Insurance Limited is listed on the Australian Stock Exchange (ASX) under stock code . You can view their investor website here. QBE underwrites general and reinsurance risks, investment management and management of the economic entity's share of the NSW and Victorian workers' compensation scheme. QBE was listed on the ASX on 28 June, 1973. John Cloney is the Chairman for QBE Insurance and Francis O'Halloran the CEO. Check your charts and good luck with your share trading!