While the ASX has disappointed in 2015, QBE Insurance Group Ltd (ASX: QBE) has performed exceptionally well, with its shares rising by 15% versus a 4% fall from the ASX. Looking ahead, further outperformance appears to be on the cards for the following three reasons.
A sound strategy
A key reason for QBE's rising share price this year has been improving investor sentiment, with the market being supportive of QBE's current strategy. A central theme of this strategy has been to offload business units which QBE feels do not offer the most appealing risk/reward potential and, therefore, are deemed to be non-core. For example, in the current financial year QBE has already sold its Argentine workers' compensation business as well as non-core US and Australian agency businesses, while it also recently announced the sale of its mortgage and lender services business, too.
The sale of non-core assets is likely to have a positive impact on QBE's financial performance, with it allowing the company to focus on core areas so as to generate efficiencies. For example, QBE is on-track to deliver a total run rate of savings of $350m by the end of the current year, with additional cost savings of $100m being planned for 2016.
Furthermore, QBE has a clear growth plan, with its recently appointed Group Chief Strategy Officer identifying opportunities for future growth. For example, QBE is aiming to develop its multi-channel distribution approach in Australia and New Zealand, build upon its presence in Emerging Markets and also focus on digitally-enabled small-to-medium enterprise products.
Improving performance
The effect of QBE's strategy on its financial performance has been extremely positive, with the company moving back into profitability after a challenging period. Looking ahead, QBE is forecast to increase its bottom line by 57% between financial year 2014 and financial year 2016 which, if met, is likely to have a positive impact on investor sentiment.
Looking beyond 2016, QBE has a real opportunity to expand into Emerging Markets and to continue to post strong bottom line growth. For example, between 2010 and 2020, infrastructure investment in Asia is expected to total $8tn. For QBE this presents an opportunity to help satisfy changing insurance needs in sectors such as engineering and construction. And, in terms of individual insurance policies, an ageing population and increasing personal wealth are also likely to contribute to significant opportunities for QBE to deliver a growing bottom line.
Income potential
With interest rates likely to continue their fall as the Australian economy endures a challenging period, QBE has real appeal as an income play. Although it currently yields less than the ASX at 4.1% versus 4.6% for the wider index, dividends per share are due to rise by 34% next year so that QBE is set to yield 5.5%. And, with the previously mentioned growth opportunities alongside a modest payout ratio of 60%, there is plenty of scope for further dividend increases over the medium to long term.
