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One of the most difficult industry to value is insurance, given that they adhere to different rules compared to other companies. For instance, insurance firms that invest excess premiums are required to maintain a certain level of reserves to reduce the risk to shareholders. Looking at data points such as book values, along with the return and cost of equity, can be suitable for gauging QBE’s intrinsic value. Below I’ll determine how to value QBE in a fairly useful and easy method.
See our latest analysis for QBE Insurance Group
What Model Should You Use?
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. The regulatory environment in Australia is fairly rigorous. Furthermore, insurance companies tend to not possess substantial amounts of tangible assets on their books. Excess Returns overcome some of these issues. Firstly, it doesn’t focus on factors such as capex and depreciation – relevant for tangible asset firms – but rather emphasize forecasting stable earnings and book values.
Calculating QBE’s Value
The main belief for Excess Returns is that equity value is how much the firm can earn, over and above its cost of equity, given the level of equity it has in the company at the moment. The returns in excess of cost of equity is called excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (0.094% – 8.6%) x $6.72 = $0.058
We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= $0.058 / (8.6% – 2.8%) = $1
Combining these components gives us QBE’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $6.72 + $1 = $7.72 (A$10.73)
This results in an intrinsic value in the company’s reported currency of $7.72. However, QBE’s primary listing is in Australia, and 1 share of QBE in USD represents 1.389 ( USD/ AUD) share of OTCPK:QBEI.F, so the intrinsic value per share in AUD is A$10.73. Compared to the current share price of US$11.04, QBE is trading in-line with its true value. This means there’s no real upside in buying QBE at its current price. Pricing is one part of the analysis of your potential investment in QBE. Analyzing fundamental factors are equally important when it comes to determining if QBE has a place in your holdings.