QBE Insurance has not put itself up for sale but that does not mean its board of directors would not take seriously a takeover offer that delivered long suffering shareholders a significant premium to the current share price.
The market likes the idea of a takeover offer judging from the knee jerk response to speculative reports published in Germany that global insurer Allianz is willing to offer $15 a share for QBE.
The near five per cent surge in the QBE share price fizzled once the company told the market "it is not in discussions with Allianz or another other potential buyer".
The QBE takeover speculation lacks credibility for a number of reasons.
First it is only at a 22 per cent premium to the prior close. That price is grossly inadequate given the likelihood for an uptick in earnings over the next two years.
QBE is expensive relative to its global peers but its exposure to rising interest rates in the United States gives the board a strong argument for a much higher offer price.
Every one per cent increase in US bond yields adds $US250 million to the QBE bottom line.
It is possible to make $15 look like a premium of more than 30 per cent but you have to use a three month volume weighted average which would take in the lowest trading levels in about 13 years.
The second reason why the Allianz speculation looks rickety is that QBE has not started a process to sell the company.
If a process had been started and the discussions between QBE chief executive John Neal and Allianz chairman and CEO Oliver Baete were on that topic then QBE would be in breach of its continuous disclosure requirements.
Irrespective of the legal obligations on Neal and the QBE board, it is difficult to build the case in favour of soliciting offers for QBE.
In the five years that Neal has been in the CEO's chair the company has been to hell and back.
Neal has had to deal with a range of legacy issues including significant problems in South America and North America. As well, the past five years has seen expansion in insurance capacity and a fall in commercial insurance premiums.
Two other issues that have tended to go against Neal is the strength of the US dollar against the Australian dollar and the spike in claims inflation. It is unfortunate for Neal that over the past five years QBE's shares have under performed the S&P; ASX200 by about 60 per cent.
But as CLSA analyst Jan van der Schalk has said Neal has positioned the company for a hardening in global insurance rates. Neal has every reason to achieve a turnaround and bask in the glory rather than try and sell the company to the highest bidder.
Neal is sticking with the existing corporate strategy which includes occasional meetings with CEOs from other large companies in the global insurance industry.
Baete at Allianz has good reason to seek expansion by acquisition. During his tenure as CEO Allianz has slipped relative to the performance of its home stockmarket.
But the only way he could make the QBE deal work would be to get it on the cheap and launch a huge cost cutting exercise.
After going to hell and back over the past five years, Neal would no doubt like to go out on a high with double digit earnings growth.
QBE is a truly global company with operations in 37 countries. But it is really a play on the US, Europe and Australia which account for 90 per cent of gross written premiums.
QBE, which will release its full year results for the year to December 31 on February 27, is tipped to report a n 18 per cent decline in earnings per share to 73c, according to consensus data from S&P; Capital IQ. The consensus is for 16 per cent growth in EPS in 2017 and 13 per cent in 2018.
At least this year's lead up to the profit result has not included a profit downgrade which has happened four times in the past five years.
