Has QBE Insurance Group Limited’s share price bottomed?

The worst may now be behind the global insurer.

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Nothing reinforces the profits which can flow to astute stock pickers quite like a review of the relative performance of a group of peer companies. Consider the following variability in returns should you have owned one of the following insurance sector stocks over the past five years.

The domestically focused Insurance Australia Group Ltd (ASX: IAG) has recorded a 62% gain in its share price; health insurer NIB Holdings Limited’s (ASX: NHF) shares have soared 241%; shareholders in insurance broker Austbrokers Holdings Limited (ASX: AUB) have seen their shares rally 171%; while the global insurance giant QBE Insurance Group Ltd (ASX: QBE) has experienced a torrid five years in which its stock price has lost 41% of its value.

The variation in returns certainly proves that it pays to be selective!

While the recent past has been awful for QBE shareholders, today’s release of QBE’s full-year results for the period ending 31 December 2013 could mark the end of the downtrend in earnings and share price. After touching a decade low price of $10.05 in December 2013, the stock has bounced off of these lows, including a 4.5% rally in the shares today to $12.15.

Before considering the company’s future potential though, here are some key points from the full-year result.

  • Cash profit of US$761 million, down from US$1.042 billion
  • Cash earnings per share US$0.629 compared with US$0.891 in 2012
  • A fully franked final dividend of A$0.12, bringing the total dividends for 2013 to A$0.30, down from A$0.50 in 2012
  • With the exception of the troubled North American operations, premium growth in local currency was solid in all divisions

So does the outlook suggest that the worst has past?

Management is keenly focused on fixing the troubled North American division via reducing the expense ratio through premium generation and cost reduction initiatives.

Management expects premium rates to firm during 2014 and is targeting a combined operating ratio (COR) of 93% and an underlying insurance profit margin of around 10%. In comparison, in 2013 the COR was 97.8% and the margin was a lowly 5.5%.

Foolish takeaway

While QBE is not ‘out of the woods’ yet when it comes to its North American division, the change in management has switched the focus from top line revenue growth to improving the underwriting discipline of the group. The operational transformation program should set the insurer on a platform of lower operating costs and hopefully more predictable earnings, which will mean an end to the shock downgrades which have been a feature of the past few years.

There is now arguably more upside than downside risk from this point, which could mean we’ve seen the bottom for QBE’s share price decline.

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Motley Fool contributor Tim McArthur owns shares in QBE Insurance Group Ltd and NIB Holdings Ltd.

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