5 reasons why QBE Insurance Group Ltd is set for a huge 2016

The QBE Insurance Group Ltd (ASX: QBE) share price remains unnecessarily bound by pessimistic forecasts. The company has a massive opportunity to build investor faith over the next six months.

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Here's a sobering thought: if you're a long-term holder of QBE Insurance Group Ltd (ASX: QBE), you've almost certainly lost money. QBE's share price remains bound in the same $10 to $15 range that it's been in for nearly five years, but there's finally light at the end of the tunnel.

5 reasons why QBE is set for a huge 2016

QBE's share price has been constrained by the lingering class action lawsuit lodged by Maurice Blackburn in September, and the relatively poor operational performance of major rival Insurance Australia Group Ltd (ASX: IAG) in the first half of the year.

I believe investors are too quickly discounting QBE's ability to beat its current earnings forecast for the full 2015 financial year.

Here are five reasons why QBE could break clear of the $15 mark in 2016:

  1. There has been a noticeable lack of natural disasters in 2015. Unlike in 2014 when massive tornados and storms lashed much of the US east and west coasts and floods ravaged the Australian east coast, QBE's major insured regions have escaped relatively unscathed. This will limit the claims received by QBE and therefore boost the insurance margin.
  2. QBE will benefit from improved bond yields. The US 10-year bond yield has improved from 1.68% in January to just below 2.50% in June and now sits at around 2.17%. QBE's investment portfolio is expected to generate higher returns than previous years as the asset allocation has moved to a higher portion of growth assets and higher bond yields return greater income.
  3. QBE's removed two of its most troubled divisions. Last years' profit downgrade was due to poor underwriting standards at its Latin American workers compensation business and dragged down further by the loss-making US Mortgage & Lender Services (M&LS) business. Both of these divisions have since been sold.
  4. QBE will increase its dividend payout ratio. QBE has paid out "up to 50% of cash profits" as dividends in last couple of years as the new management team aimed to strengthen the balance sheet (ie by investing more profits in the company). Now that the company is back on the straight and narrow, management has decided to raise the pay-out ratio from 50% of cash profits to 65%, which will increase interest in the stock from income-hungry investors.
  5. QBE could cut more costs than expected. I believe new CEO John Neil would have released the earnings guidance at the beginning of the year assuming maybe 30% of his ideas went as planned. Now that the group's successfully raised capital, sold off a number of underperforming business units and avoided major catastrophes, management should have had time to investigate further cost-cutting measures to boost margins.

Should you buy QBE now?

I remain a holder of QBE, however adding to my position now would make it an unwieldy section of my portfolio so I'm looking for similar opportunities elsewhere.

Motley Fool contributor Andrew Mudie owns shares of QBE Insurance Group Ltd.  You can find Andrew on Twitter @andrewmudie. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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