Shareholders in QBE Insurance Group Ltd (ASX: QBE) experienced a tumultuous year in 2013. Up until early December shareholders thought they were on track for a gain of around 35%, however in the final days the stock price plunged after the insurer issued another earnings downgrade. As a result QBE shareholders recorded a gain closer to 5% for calendar year 2013 and underperformed the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), which returned 14.6%.
The earnings downgrade was unexpected, however not uncharacteristic, given the recent issues the company has faced. With the stock price now hovering around the $11.50 mark and hopefully all of the bad news and downgrades now accounted for, the question is – what’s next for QBE?
Unfortunately the near-term outlook for QBE’s earnings is not particularly enticing. With a financial year ending in December, by late February investors will have the opportunity to analyse the full-year results in much greater detail. The most recent company guidance states that QBE is expected to report a net loss of around $250 million and a cash profit after tax of around $850 million. In comparison, in FY 2012 the company reported a cash profit of $1.042 billion.
Given the nature of the decline in earnings, investors won’t necessarily see a speedy rebound, as such the outlook for the remainder of 2014 looks muted.
With the recorded loss partially due to higher claims provisioning and the company providing guidance that the combined operating ratio in certain divisions has declined markedly, QBE may need to retain capital to boost its reserves – although management did reiterate that regulatory and rating agency capital levels remain above benchmark levels. Capital requirements have the potential to restrict available cash for dividends.
Further evidence that investors should expect a lower dividend during 2014 is the board’s stated policy to pay out up to 50% of cash profit. Given the lower cash profit which is expected to be reported, the dividend is likely to be cut.
QBE has been a successful company for many years, but it certainly appears to have entered a bumpy period. Investors with a long-term horizon may find long-term value in the stock, however the near-term may continue to be a difficult period for shareholders.