What Happened? QBE Insurance Group Ltd (ASX: QBE) continued its balance sheet revival program today by announcing the sale of its mortgage and lender services business in North America for $90 million, around $120 million below the book value of the unit.
Why? QBE Insurance's new management team has been on the warpath, stripping out non-core operations in a quest to strengthen the once-mighty insurance company's balance sheet.
The project has thus far included an oversubscribed equity raising in September 2014, a $700m debt issue in November 2014, the sale of the group's US agency businesses for $300m in January, and the sale of the Argentinian workers' compensation business for US$95m in February.
Management expect that the group's gross written premium (essentially revenue) will fall by $400 million following the sale, however it will improve the North American operation's combined operating ratio (COR) and return on allocated capital by around 1.5% and 1.8% respectively.
An improvement in the COR will help the North American operations turn a reasonable profit in the 2015 and 2016 financial years, barring any other major issues.
What Now? QBE's shares responded positively to the news, rising around 1.5% by lunch time to around $14.60, very close to the 12-month high of $14.82 reached in May.
In the most recent investor update, from early May, QBE reaffirmed guidance of gross written premium (GWP) between US$15.5bn and US$15.9bn, net earned premium (NEP) between US$12.6bn and US$13.0bn, a combined operating ratio (COR) between 94% and 95%, and an insurance profit margin of between 8.5% and 10%.
Investors should assume that this is still achievable following the sale, as only one quarter of revenue will be lost.
Analysts expect this to convert to earnings per share (EPS) of 72.5 cents and dividend per share (DPS) of 40.5 cents this year and up to 84 and 49 cents next year. This implies a 2015 FY price to earnings ratio of 20.1 and dividend yield of 2.7%.
