Investors don't seem to have much faith in QBE Insurance Group Ltd (ASX: QBE) as we head towards the insurers full year report, expected to be out on the 23rd of February.
QBE shares have lost 27% of their value in the past six months and fell from highs of $15 per share earlier this year; although they are down only 8% in the past twelve months. It seems investors are doubting the company's upcoming report, questioning whether management can streamline the business as they have claimed.
The bad
In its recent 3rd quarter trading update, QBE confirmed that its guidance for a combined operating ratio of 94-95% was unchanged, with the final figure expected to be towards the top end (higher is worse) of guidance. The insurance profit margin would be towards the bottom end (higher is better) of the previously announced 8.5%-10%.
Previously, in 2014, QBE had a combined operating ratio of 96.1% and insurance margins of 7.6% so 2015's results look to be a measurable improvement.
The company's claims ratio continues to remain under pressure as growth in its premiums are slower than the rate of inflation in the ANZ and North American regions.
The good
QBE has announced an increase in its dividend payout ratio, to a maximum of 65% of cash profit for the interim of 2016 and beyond. Given that QBE made average earnings of around 2.7% on its investment portfolio in the 2014 financial year, returning the cash to shareholders is a sound move.
On the plus side, growth assets comprised a significantly larger portion of QBE's portfolio in 2014 than they did in 2013 and hopefully management has maintained that focus on growth throughout the 2015 financial year.
Additionally, the vast majority of QBE's interest-earning portfolio comes to maturity in the next twelve months, giving the company the opportunity to look for higher returns given the recent rate rise in the US.
Management also claims there is room to improve its expense ratio, as this is currently some 2-3% higher than its global peers. A further $100m in cost savings is targeted in the next financial year, supported by a lift in IT services and processing efficiency. This could mean a meaningful lift in earnings even without business growth.
A targeted approach to customer retention combined with investment in emerging markets like the Philippines is expected to deliver organic premium growth of 3-4% per annum over the next few years. I have written previously on the benefits of emerging markets and customer retention for insurers, and these initiatives are solid step forwards for QBE.
Well, should I buy it?
I had the chance to buy QBE today as it fell below $10 – but I chose to write this article instead. So perhaps the company is not a screaming bargain, but neither is it priced for a highly successful future and there is certainly scope for upside from today's prices if management can follow through on its identified areas that need improvement.
I believe investors looking for a reliable dividend payer with the potential for steady earnings growth could do a lot worse than to add QBE to their portfolio at today's prices.
