AUSTRALIA QBE AU Price (at 10:44, 27 Apr 2016 GMT) Neutral A$11.19 Valuation A$ - DCF (WACC 9.3%, beta 1.1, ERP 5.0%, RFR 3.8%) 11.34 12-month target A$ 12.00 12-month TSR % +12.7 Volatility Index Low/Medium GICS sector Insurance Market cap A$m 15,341 30-day avg turnover A$m 40.4 Number shares on issue m 1,371 Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E NEP m 12,314 11,931 12,036 12,405 Underwriting Result m 629 729 669 655 Investment Income m 703 622 793 940 Reported profit m 687 801 885 987 Net Op Income m 782 861 945 1,047 EPS adj 56.8 62.4 68.5 75.9 PER adj x 15.2 13.9 12.6 11.4 PER rel x 0.98 0.82 0.84 0.83 DPS 40.0 40.9 43.2 47.7 Dividend yield % 4.6 4.7 5.0 5.5 Franking % 100 100 50 50 Total SH Funds m 10,560 10,784 11,073 11,436 BV/S 767.6 783.9 804.5 830.5 ROE % 7.3 8.1 8.7 9.4 ROA % 1.9 2.2 2.4 2.6 P/BV x 1.1 1.1 1.1 1.0 QBE AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, April 2016 (all figures in USD unless noted, TP in AUD) LMI well managed on the way down Event QBE s LMI ASIC filings have become available. Despite contraction, the business unit remained extremely profitable, but the read-through for the broader ANZ business was not as attractive. Impact QBE LMI well managed on the way down: QBE LMI GWP contracted in FY15 following the loss of the WBC account and lower LVR lending. The NEP numbers did not contract at the same velocity due the earn-through of the back book and a restructuring of the reinsurance program to cancel the 25% Quota Share (now back book only) and replacement with a stop-loss program on the front book at a 100% COR. Risk assessment: QBE has again released reserves following a risk assessment of LMI. FY15 post-tax benefit $11.1m, FY15 $58.8m. The changes boosted the GWP and NEP in both 2014 and 2015. Releasing capital: $226m dividends were paid during the year (2014: $65m) with a further $100m declared in Feb 2016 (Feb 2015: $50m). Claims rates: In setting expected current default to claims assumptions QBE has cut the expected Claims rate to 15.4% (FY14 22.7%). What this means for the other parts of QBE in Aust and NZ: QBE ANZ excl. LMI delivered an insurance margin of 8.6% in FY15 vs. QBE ANZ insurance margin of 14.2% (given the QBE LMI margin of 84.4%). QBE ANZ performance: LMI vs. Excl. LMI (A$m) QBE LMI - AUD FY14 FY15 QBE ANZ Excl. LMI - AUD FY14 FY15 GWP 441 307 GWP 4,439 4,644 NEP 362 318 NEP 3,898 3,972 Net Claims Incurred - 20 24 Net Claims Incurred 2,508 2,662 Net Commission 4-10 Expenses 1,150 1,183 Other Expenses 64 59 Underwriting Result 314 245 Underwriting Result 240 128 Investment Income 35 23 Investment Income 165 213 Insurance Profit 349 268 Insurance Profit 405 341 LR -5.6% 7.5% 64.3% 67.0% ER 18.9% 15.3% 29.5% 29.8% COR 13.2% 22.8% 93.8% 96.8% Insurance Profit Margin 96.5% 84.4% 10.4% 8.6% Source: Company data, Macquarie Research, April 16 Earnings and target price revision No change. Price catalyst 12-month price target: A$12.00 based on a DCF methodology. 27 April 2016 Macquarie Securities (Australia) Limited Catalyst: QBE Investor Day 10 May 2016. Action and recommendation Neutral. Decline in LMI pressures margins but releases capital. Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Group Source: Company data, Macquarie Research, April 2016 Price: AU$11.19 Year ended: 31 December Underwriting Accounts 1H15A 2H15A 1H16E 2H16E FY14A FY15A FY16E FY17E FY18E Gross Written Premium US$m 8,692 6,400 8,604 5,813 16,332 15,092 14,417 14,217 14,644 Movement in Unearned Premium US$m (1,399) 1,229 (1,401) 1,269 189 (170) (132) (184) (187) Gross Earned Premium US$m 7,293 7,629 7,202 7,082 16,521 14,922 14,284 14,033 14,457 Reinsurance Expense US$m (1,064) (1,544) (1,115) (1,238) (2,437) (2,608) (2,353) (1,997) (2,052) Net Earned Premium US$m 6,229 6,085 6,087 5,843 14,084 12,314 11,931 12,036 12,405 Net Claims Incurred US$m (3,727) (3,707) (3,594) (3,586) (8,900) (7,434) (7,180) (7,316) (7,570) Commission Expenses US$m (1,073) (1,041) (1,033) (991) (2,363) (2,114) (2,024) (2,020) (2,081) Other Underwriting Expenses US$m (1,134) (1,003) (1,048) (949) (2,274) (2,137) (1,998) (2,031) (2,099) Underwriting Result US$m 296 335 412 317 548 629 729 669 655 Investment income on technical reserves US$m 241 161 169 216 527 402 385 493 581 Insurance Trading Result US$m 537 496 581 533 1,075 1,031 1,114 1,162 1,237 Normalised investment income on SHF's US$m 148 138 137 145 283 287 282 332 392 Investment income market adjustment US$m (3) (20) (27) (18) (12) (24) (45) (32) (34) Interest expense US$m (127) (117) (127) (127) (297) (244) (254) (254) (254) Amortisation and impairment US$m (25) (70) (30) (30) (117) (95) (60) (60) (60) Sale of business US$m 150 (152) - - - (2) - - Operating Profit Before Tax US$m 680 275 534 503 932 953 1,037 1,148 1,281 Income Tax Expense US$m (189) (71) (118) (111) (182) (260) (228) (252) (282) Minority Interest US$m (2) (4) (3) (5) (7) (6) (8) (10) (12) Net Profit After Tax US$m 489 200 414 387 743 687 801 885 987 Reported Earnings US$m 488 199 414 387 743 687 801 885 987 Adjusted Earnings US$m 513 269 444 417 860 782 861 945 1,047 Cash Earnings US$m 471 422 435 408 908 893 843 927 1,029 Insurance Ratios 1H15A 2H15A 1H16E 2H16E FY14A FY15A FY16E FY17E FY18E GWP Growth % 2.4-18.4-1.0-9.2-9.1-7.6-4.5-1.4 3.0 Reinsurance Outwards % 14.6 20.2 15.5 17.5 14.8 17.5 16.5 14.2 14.2 NEP Growth % -10.3-14.7-2.3-4.0-8.5-12.6-3.1 0.9 3.1 Net Claims Ratio % 59.8 60.9 59.0 61.4 63.2 60.4 60.2 60.8 61.0 Expense Ratio % 35.4 33.6 34.2 33.2 32.9 34.5 33.7 33.7 33.7 Combined Ratio % 95.3 94.5 93.2 94.6 96.1 94.9 93.9 94.4 94.7 Reported Margin % 8.6 8.1 9.5 9.1 7.6 8.4 9.3 9.7 10.0 Underlying Margin % 8.7 10.1 9.5 9.1 10.3 9.0 9.3 9.7 10.0 Investment Fundamentals 1H15A 2H15A 1H16E 2H16E FY14A FY15A FY16E FY17E FY18E EPS (Reported, Diluted) ps 35.5 14.4 30.0 28.1 63.0 49.9 58.0 64.1 71.5 EPS (Adjusted, Diluted) ps 37.3 19.5 32.1 30.2 72.0 56.8 62.4 68.5 75.9 EPS (QBE Cash basis, Diluted) ps 34.3 30.6 31.5 29.6 69.2 64.9 61.1 67.1 74.6 PER (Reported) x 12.1 31.8 12.7 12.6 14.6 18.4 12.1 11.2 10.6 PER (Adjusted) x 11.5 23.5 11.8 11.7 12.7 16.1 11.3 10.5 10.0 PER (QBE Cash basis) x 12.6 15.0 12.1 11.9 13.3 14.1 11.5 10.7 10.2 DPS A ps 20 30 25 38 37 50 63 68 71 Dividend yield % 3.6% 5.4% 4.5% 6.8% 3.3% 4.5% 5.6% 6.1% 6.3% Franking % 100% 100% 100% 100% 100% 100% 100% 50% 50% Payout Ratio (QBE Cash earnings) % 45% 80% 54% 81% 44% 63% 68% 64% 64% Effective tax rate % 28% 26% 22% 22% 20% 27% 22% 22% 22% Average AUD:USD 0.7751 0.7158 0.7229 0.6401 0.9025 0.7454 0.6815 0.6325 0.6650 EFPOWA m 1,375 1,380 1,381 1,381 1,365 1,380 1,381 1,381 1,381 NTA x 5.27 5.04 5.12 5.25 5.56 5.04 5.25 5.50 5.80 NTA (+ Prudential Margins) x 6.40 5.97 6.05 6.18 6.81 5.97 6.18 6.43 6.74 NAB x 8.01 7.68 7.73 7.84 8.52 7.68 7.84 8.05 8.30 ROA (Adjusted) % 2.3% 1.0% 2.0% 1.9% 1.7% 1.7% 2.1% 2.3% 2.5% ROE (Cash Earnings) % 8.6% 7.9% 8.2% 7.7% 7.7% 8.3% 7.9% 8.5% 9.2% Balance Sheets (US$m) FY13A FY14A FY15A FY16E Valuation Summary (A$) Assets Cash US$m 1,238 852 662 645 PV of distributable cash profit 12,269 Investments US$m 29,464 28,847 26,079 25,400 Terminal value 3,264 Other Assets US$m 8,628 8,006 8,627 8,787 Total NPAT DCF valuation 15,533 Intangibles US$m 4,480 3,831 3,604 3,544 Shares on issue 1,367 Total Assets US$m 43,810 41,536 38,972 38,377 Value per share (A$) $ 11.34 Liabilities Unearned Premiums US$m 8,184 7,366 7,006 7,138 Share price target (A$) $ 12.00 Net Outstanding Claims US$m 18,208 16,948 15,379 15,451 % upside/downside 7.3% Borrowings US$m 4,571 3,581 3,529 3,529 Total shareholder returns 11.7% Other Liabilities US$m 2,444 2,559 2,498 1,475 Total Liabilities US$m 33,407 30,454 28,412 27,593 Recommendation Neutral Net Assets US$m 10,403 11,082 10,560 10,784 Minority Interests US$m 47 52 55 60 Shareholders' Funds US$m 10,356 11,030 10,505 10,724 27 April 2016 2
Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a marginally negative view on QBE Insurance. The strongest style exposure is Growth, indicating this stock has good historic and/or forecast growth. Growth metrics focus on both top and bottom line items. The weakest style exposure is Price Momentum, indicating this stock has had weak medium to long term returns which often persist into the future. 216/245 Global rank in Insurance % of BUY recommendations 64% (9/14) Number of Price Target downgrades 5 Number of Price Target upgrades 12 Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Insurance) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. 1.0 0.3 0.1-3.0-2.0-1.0 0.0 1.0 2.0 3.0-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. -0.2-1.0-0.2-3.0-2.0-1.0 0.0 1.0 2.0 3.0-30% -20% -10% 0% 10% 20% 30% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Price to Sales NTM Sales to EV FY0 Price to Sales FY1 Price to Sales FY0 EBITDA Revisions 3 Month Price to Cash LTM Profit Margin FY1 3m Earnings Revisions -32% -33% -36% -36% Negatives Positives 39% 37% 36% 36% -40% -20% 0% 20% 40% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score 1 0.03 0.23-0.45-0.28-0.46-0.24 0.08-0.55 0.19 0.20 Percentile relative to sector(/245) Percentile relative to market(/399) 0 50 100 0 50 100 0 0 1 1 Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 27 April 2016 3
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 March 2016 AU/NZ Asia RSA USA CA EUR Outperform 50.34% 59.09% 46.67% 44.76% 60.66% 46.12% (for global coverage by Macquarie, 3.72% of stocks followed are investment banking clients) Neutral 34.14% 25.66% 32.00% 49.90% 30.33% 35.10% (for global coverage by Macquarie, 4.79% of stocks followed are investment banking clients) Underperform 15.52% 15.26% 21.33% 5.33% 9.02% 18.78% (for global coverage by Macquarie, 2.31% of stocks followed are investment banking clients) QBE AU vs ASX 100, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, April 2016 12-month target price methodology QBE AU: A$12.00 based on a DCF methodology Company-specific disclosures: QBE AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Group Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures. Date Stock Code (BBG code) Recommendation Target Price 19-Apr-2016 QBE AU Neutral A$12.00 08-Mar-2016 QBE AU Neutral A$11.91 23-Feb-2016 QBE AU Outperform A$12.91 17-Nov-2015 QBE AU Outperform A$14.39 14-Sep-2015 QBE AU Outperform A$15.73 18-Aug-2015 QBE AU Outperform A$15.59 15-Jul-2015 QBE AU Outperform A$15.73 04-Jun-2015 QBE AU Outperform A$15.47 27-May-2015 QBE AU Outperform A$15.60 27-Mar-2015 QBE AU Outperform A$15.30 17-Mar-2015 QBE AU Outperform A$15.20 25-Feb-2015 QBE AU Outperform A$13.90 14-Jan-2015 QBE AU Outperform A$11.70 04-Nov-2014 QBE AU Neutral A$11.60 20-Aug-2014 QBE AU Neutral A$11.40 30-Jul-2014 QBE AU Underperform A$11.20 04-Jul-2014 QBE AU Neutral A$13.70 27-May-2014 QBE AU Neutral A$13.50 05-Mar-2014 QBE AU Underperform A$13.10 25-Feb-2014 QBE AU Underperform A$13.00 27 April 2016 4
05-Feb-2014 QBE AU Underperform A$12.40 20-Jan-2014 QBE AU Underperform A$12.50 12-Dec-2013 QBE AU Underperform A$12.30 09-Dec-2013 QBE AU Underperform A$13.20 20-Nov-2013 QBE AU Outperform A$17.10 14-Nov-2013 QBE AU Outperform A$17.20 18-Sep-2013 QBE AU Outperform A$17.00 02-Sep-2013 QBE AU Outperform A$17.40 20-Aug-2013 QBE AU Outperform A$17.20 31-Jul-2013 QBE AU Outperform A$17.80 02-Jul-2013 QBE AU Outperform A$17.40 24-Jun-2013 QBE AU Outperform A$17.10 13-May-2013 QBE AU Neutral A$14.40 02-May-2013 QBE AU Neutral A$13.94 Target price risk disclosures: QBE AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. 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