by
Justin McCarthy | Aug 26, 2013
QBE released their 1H13 results (to 30 June 2013) last week. Despite the negative headlines in the press, the results were another example of “good for debtholders but not so good for shareholders”.
The 1H13 profit missed market consensus, coming in at $US477m. This compares with analyst estimates ranging from $US491m to $US637m. The profit figure for 1H13 was down 37% on 1H12 and extends the recent history of both declining profitability and missing market consensus. While this is clearly not a great outcome, it is of far more consequence for equity investors than debt investors.
Further disappointing the equity market, management advised that gross written premiums from North American operations have been revised down by $US600m (to $US5.9bn) and that underlying profitability for the second half of the year is expected to remain stable (and not improve to levels seen a few years back).
Against this backdrop, the balance sheet of QBE remained solid and the capital position, as measured by the APRA prescribed capital amount or PCA (formerly the minimum capital ratio or MCR), improved from 1.57x at 31 December 2012 to 1.61x at 30 June 2013. It is the balance sheet strength and improving capital position which is of greater importance to debtholders.
Management also reported continued progress in deleveraging with debt/equity ratio down to 40.8% versus 43.4% at December 2012, and on target to be 40% or lower by year end. Including the repayment of US$211m of subordinated debt on 1 July 2013 (once again called at first opportunity), debt has fallen US$381m since the end of December to US$4.6bn. This contrasts against a balance sheet of US$42.5bn, including US$9.7m of cash and short term money market investments and a further US$6.0bn in highly liquid government bonds.
Finally, we are enthused by the company’s decisions to maintain a low dividend payout ratio of 50-60%, another example of something not popular amongst shareholders but a policy that has lead to an increase in shareholder’s equity (and PCA) that is of direct benefit to the debtholders that sit higher in the capital structure.
QBE do not have any AUD bonds in the market but there are a number of subordinated bonds and Tier 1 hybrid securities in non-AUD, mainly USD, which we believe exhibit strong relative value (available to wholesale clients only).
We remain comfortable with the credit and call risk of the “old style” QBE step-up securities and expect QBE to continue to call at first opportunity (subject to regulatory approval and market conditions at the time of first call date).
For further information on the available non-AUD QBE securities, please contact your dealer or call 1800 01 01 81.