Investors in QBE Insurance Group Ltd (ASX: QBE) have been on a wild ride over the last few years. But the tables are finally turning for the insurance giant. Before you jump in and buy shares, here are five important things that you must know:
1. That the cycle is turning up
Insurance companies are notoriously cyclical in their returns to investors. This is because of the ebbs and flows of natural disasters and economic conditions. QBE's results took a turn for the worst after a severe drought and Hurricane Sandy in the U.S. in 2012. These events also followed an appalling break-down in a number of past acquisitions.
Since then fewer disasters, business group consolidation and hundreds of millions in cost savings programs have helped QBE turn a corner and have put the company back on the up-cycle for the foreseeable future.
2. Where the company is focusing
QBE's focus is now squarely on achieving 2015 guidance. Supported by a policy of "no surprises" the company is stabilising its insurance reserves and improving investment returns by better utilising the company's significant cash pile. As of 31 December, 2014 QBE had over US$28.5 billion in investment assets.
3. The prospect of rising U.S. interest rates is sending investors crazy
Until recently, 87% of that US$28.5 billion was invested conservatively in bonds and short-term money. This mix should come down going forward, but it's no surprise that the prospect of rising U.S. interest rates has been a big part of QBE's share price jump this year. Shares in QBE have risen 28% so far in 2015 compared to a 10% fall in Insurance Australia Group Ltd (ASX: IAG).
Although no one knows quite when a rates rise is expected to occur on signs of rising U.S. inflation.
4. Finally! More aggressive investments!
QBE's conservative investment approach has been to the horror of investors like me comparing the company's pitiful 2.6% investment returns to sky-rocketing equity markets.
However QBE has finally changed tack to increase the percentage it invests in growth assets (equities). The growth asset strategy is already reported to be producing results, with QBE reporting annualised first quarter 2015 (net) investment returns "well ahead" of Financial Year 2014 returns of 2.7%.
5. That the dividend could be set to rise
As free cash flows start to increase, investors are expecting an increase to the dividends sent their way. QBE has acknowledged it is targeting strongly growing dividends which it expects to be fully franked in 2015 and 2016. The company is also reviewing its existing dividend policy to pay out 'up to 50% of cash profit'. This has been lifting investors' spirits.
