QBE – becoming shipshape?

QBE seems to be welding the pieces together.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

QBE (ASX: QBE) has announced an update on its ambitiously named Global Operational Transformation Program. The two major targets are:

  • Reducing the costs of doing business, largely by transferring low margin/high value activities (call centres, basic processing, etc.) to wholly owned offshore entities. Savings of around $230 million are expected by the end of 2015.
  • Strengthening the balance sheet via capital management initiatives (partly undertaken), sales of non-core assets and lowering the dividend payout ratio. A debt-to-equity ratio of less than 40% is expected by the end of calendar 2013.

QBE also confirmed that investment earnings are expected to remain in the range of 2.25% for the current year. On this, it is important to note the company is no Berkshire Hathaway and has kept little exposure to equities in recent years. Therefore shareholders cannot expect any 'windfall' value gain from the rise in US and other stock markets. QBE's investment earnings are almost purely dependent on the direction of interest rates.

QBE has had a history (until recently) of strong operational management and enviable insurance margins. However, a simple case of too many acquisitions has led to the usual indigestion, especially in the US operations. With the Americas accounting for over 50% of QBE's premium income, firm action here is a requisite for any substantive profit improvement.

A recent Macquarie report on QBE, in part comparing QBE to Ace Insurance (NYSE: ACE), highlights the dramatic operational impact of too much, too soon in the way of acquisitions.

Underwriting expense ratio is a core and vital measure of insurance company performance (the lower the ratio, the better). Since commencing major acquisitions in the US (2006), QBE's US underwriting expense ratio has climbed from 8.2% to 21.5% in 2012. Clearly not sustainable! In the same period, the Ace Insurance underwriting expense ratio has moved from a comparable 8.8% (2006) to 11.8% in 2012.  Although no two companies are directly compatible on all measures QBE and ACE have very similar profiles.

In Europe QBE's underwriting expense ratio is 15% and in Australia 16% — in line with or slightly better than most competitors. More needs to be done here too.

Foolish takeaway

QBE has coped with many storms in the past and none of the present problems are insurmountable. It is a quality company with resourceful management experience and skills. Does the current price (around $16) justify an investment? At anticipated 2014 earnings of $1.30, the P/E ratio would be 12.3, and the largely unfranked dividend yield 4%. However these raw figures underplay the potential should economic and insurance conditions stabilise or improve over the next few years. In this Fool's opinion, QBE will remain a solid investment for the medium to long term.

In the market for high-yielding ASX shares? Get "3 Stocks for the Great Dividend Boom" in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading


Motley Fool contributor Peter Andersen owns shares in QBE.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »