A quick review of QBE Insurance Group Ltd's (ASX: QBE) financial performance over the last 10 years paints a sad story. While gross written premium (essentially revenue) has grown steadily from US$6.7 billion in 2004 to US$17.9 billion in the 2013 calendar year, net profit has fluctuated wildly.
Net profit rose steadily through the mid 2000s and peaked at just under US$2 billion in 2009, but has since fallen to a US$250 million loss in 2013. QBE's dividend yield has also plunged, falling from 7% in 2010 down to just 2.8% in 2013, while earnings and cashflow per share were the lowest in a decade in 2013.
A 2014 turnaround?
QBE management are now promising that this time is different. Having missed earnings guidance (QBE's own guidance) for at least the last three years, investors and institutions have been understandably weary. QBE's share price has recovered nearly 30% since hitting a five-year low of $10.05 back in December, following the most recent negative earnings surprise. If QBE can deliver its turnaround as forecast, the current share price may well prove to be a cheap entry point.
On track to deliver
QBE management last week confirmed that the first three months of 2014 are tracking as expected to hit earnings targets announced earlier in 2014. QBE are expecting to deliver:
- Gross written premium of between US$16.8 billion to US$17.3 billion, down from US$17.9 billion in 2013,
- Net earned premium of between US$14.7 billion to US$15.2 billion, down from US$15.4 billion in 2013, and
- An insurance profit margin of around 10% of net earned premium, up from 5.5% in 2013.
If QBE can deliver then shareholders can expect a net profit of around US$1.2 billion, a dividend yield of up to 4%, and a significant rise in the share price.
Foolish takeaway
QBE's shocking 2013 result was largely a result of the company's poorly performing North America division. The restructure is underway and management are targeting $250 million in cost savings to help boost profit in coming years. Importantly, QBE continues to generate strong cashflow to sustain a healthy dividend payment and strengthen the balance sheet. For patient investors, with faith in QBE's management, buying now could deliver spectacular long-tem returns.
