QBE Insurance Group Ltd (ASX: QBE) has reported an underlying net profit of US$807 million for the 2015 financial year, despite significant headwinds.
The company has faced low interest rates for many years – which affects the investment earnings it can generate on its float (pre-paid premiums), but also faced a stronger US dollar, challenging insurance pricing and investment markets.
The adjust profit was up just 1% on the prior year, but 12% on a constant currency basis – reflecting the stronger US dollar.
Gross written premium (GWP) fell 10% to US$14.8 billion from US$16.3 billion – reflecting challenging insurance markets.
The company declared a 50 (Australian) cent fully franked dividend, up 35% compared to the 37 cents per share paid out for the 2014 financial year. At the current share price of around $10.39, that reflects a net dividend yield of 4.8%.
So What?
It appears to be a decent result for QBE, with many indicators heading in the right direction. Return on Equity was up 1% to 7.5%, Insurance and underwriting profits were both up and combined operating ratio (COR) fell to 94% – a good sign for an insurance company.
QBE says it has made close to $400 million of cost savings, including $126 million of incremental benefits in 2015. The company expects to see another $150 million reduction in operating expenses in 2016, and eliminate another $150 million of costs in 2017-18.
Now What?
Given the improved earnings quality and balance sheet strength, QBE has decided to up its dividend payout ratio to 65% commencing from the 2016 interim dividend. That should see shares sport a higher dividend yield.
However, QBE is targeting gross written premium (GWP) of around US$14.4 billion, and a combined operating ratio of around 94-95%, suggesting 2016 results should be roughly in line with the 2015 financial year – obviously depending on many factors beyond the control of the company such as currency and natural disasters.
Foolish takeaway
QBE CEO John Neal has done a stellar job sorting out the mess that was QBE a few years ago and further improvement appears highly likely. Interest rates in the US are rising and should provide a nice tailwind – as long as other factors play their part.
