QBE Insurance (QBE)

Fat Prophets

Thursday 27th March 2014

What’s new

Full year results from QBE Insurance (ASX: QBE) announced last month were hardly glowing. Australia’s second largest insurer reported a US$254 million net loss for the year to 31 December 2013 on the back of operational issues and write-downs at the company’s troubled US division. The large bottom line loss compares to last year’s profit of US$761 million. The company’s cash profit came in at US$761 million compared to a December forecast of US$850 million, but the miss by caused by one-off restructuring costs being deemed cash items.

The shares, however, rallied on the results, as there was no doubt relief that no more skeletons were revealed, and the red ink had already been flagged to the market back in December of last year.

Outlook

There have been a number of false dawns for QBE Insurance over the years, but we believe the latest set of results could mark the nadir for the insurer.

Management is well aware that the US business has not been performing effectively and has implemented remedial actions to ensure that the business is not the source of any more major negative surprises going forward. Mistakes here arguably lay with previous senior executives, and we are optimistic that the relatively new broom, CEO John Neal, has cleared the slate with respect to, and following an extensive review at, the company’s US business.

Management is also overseeing a major transformation program which is on track to deliver annual cost savings of at least US$250 million by the end of 2015.

North America aside, QBE’s other four divisions are performing solidly, and are leveraged to an upswing in the premium cycle. Management is forecasting that rates will increase by 2.5 percent on average in 2014, and more than offset any uptick in claims.

A low duration fixed interest portfolio, meanwhile, leaves QBE Insurance well placed to deliver improved investment returns, as interest rates rise in the years ahead.

Price

The stock price performance of QBE Insurance has been disappointing, with shares down 12 percent and 4 percent over the past 6 and 12 months, respectively. Investor sentiment towards the stock has been severely tested in recent times due to earnings shocks and impairments, most of which stemming from previous management’s acquisition strategy.

Worth Buying?

With the decks largely cleared of legacy issues, there is every prospect that we have seen the bottom of QBE Insurance’s earnings cycle. As such, we do not regard a prospective earnings multiple of 13.8 times, falling to 11.6 times for 2015, as demanding. The shares are also supported by a fully franked 3.6% dividend yield.

Consequently, we believe the stock is worth buying at current levels for those investors with a medium to long term investment horizon.

Greg Smith is the Head of Research at Fat Prophets.

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