Managed Accounts Share Trading Investment Notification - Purchase Of Qbe

Good afternoon,

Yesterday we purchased shares in QBE Insurance Group for around 15% of the MDA portfolio at $20.93. QBE shares trade a narrow technical range of between $20 on the downside and $25 at the upper end. At a purchase price around $21, the stock is near the bottom of this range after once again holding $20 support. Trading on a dividend yield of 6.1% and a PE ratio of 10.5 times current year earnings, the valuation looks compelling, and we see no reason why the stock shouldn't continue to trade in the range it has historically traded.

Fundamentally, the recent 2009 results were received quite coolly by the market, with the stock off around 10% since the day before the result. Delving into the numbers we find an interesting management forecast; with every 1% rise in global interest rates, an additional $316M in NPAT is delivered to the bottom line. Something that will no doubt make the stock a 'must have' exposure for many managed funds given we are in a rising interst rate cycle. This is reflective of the conservative style that QBE invests the premium policy income it receives. We know domestic rate increases are happening quickly, so rises in global interest rates (once they get started, probably early 2011), will almost certainly rise as fast if not faster than ours. In fact, with rates close to 0% overseas, there is the distinct possibility of as much as 3% over the course of 2011. On NPAT figures of $2B, a 3% rise in rates would add 50% to NPAT, and a similar percentage to the share price.

While we don't foresee holding QBE for such an extended period, it is worth noting that once the market's focus is on rate rises (and in true stock market fashion this will happen much sooner than later) we believe it will be the next catalyst to drive the QBE share price back near the top of it's range.

Our target for this investment is $23.50 or above, within eight weeks.

If you would like to talk to me about anything at all, please call the desk

by: Hayden Kerr

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