Don't Q for QBE

Romano Sala Tenna

Katana Asset Management

It is rare that a company rallies 5% post announcing a forecast after tax loss of $1.2 billion.    But perhaps when the bar is set as low as it was for QBE, this is a comparatively good outcome!

Clearly QBE’s market update was widely expected, despite the lack of direction from the company itself.   Many analysts and professional investors alike were of the view that QBE would update ahead of its full year results for 2 obvious reasons:

  1. Firstly, the 2017 CY was the worst on record for insurance claims, and it would be rare if not non-existent, that an insurance company would accurately determine the full extent of its catastrophe exposure in its first assessment (released 3/10/17)
  2. Secondly, a newly appointed CEO (Mr Pat Regan) traditionally has a period of grace in which to rebase earnings and expectations.

As it turned out, to our surprise the second item significantly outweighed the first issue.   The impairment charge of approximately $700m on the carrying value of the North American assets plus the $230m write-down on the carrying value of the deferred tax assets, far exceeded the additional $240m required to strengthen claims and catastrophe provisions.

So in theory, with the generous provisioning now washed through, investors could be excused for thinking that the worst is (finally) in the past.

But this is where we are perhaps more circumspect than some.   To us, the all-important  ‘Outlook’ statement rings out caution:

“…but we also have businesses that are underperforming. We have commenced a comprehensive program of work to improve both the level and consistency of performance. At the same time, we are conducting a strategic review of our Latin American Operations as we look to simplify the Group and reduce risk. I will give you more detail on these plans in conjunction with the release of our FY17 result detail on 26 February 2018”.

 

That reads like code speak for another write-down in our experience.   Whilst we are drawn by the compelling valuation, caution is the better part of valour.    We shall await the full year results before looking to re-initiate our position.


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Romano  Sala Tenna
Portfolio Manager
Katana Asset Management

Katana Asset Management was founded in September 2003 as a boutique investment management firm. Katana employs an all opportunity investment mandate being style, sector and market cap agnostic.

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