QBE Insurance Group Ltd (ASX: QBE) is set to see an improvement in earnings over the coming years driven by improving insurance margins, rising insurance premiums, reduced debt and increasing cash flows.
QBE's earnings have been hit hard in recent times as a result of costly acquisitions, a spate of natural disasters in 2011 and 2012 and lower investment returns, which resulted in insurance margins falling from over 15% down to lows of 7%.
However, the future appears much brighter for QBE. Earnings are set to improve dramatically over the next few years as a result of the following:
- The company is set to benefit from major restructuring undertaken in 2013 and 2014 which will drive productivity gains and reduce costs. The cost reduction program is set to reduce costs annually by $250 million.
- QBE has a strong competitive advantage resulting from its insurance underwriting ability which may lead to higher profits over the long term. Despite being hit hard in recent times from costly natural disasters, underwriting profits should grow in coming years.
- QBE's business model is highly leveraged to a stronger US economy, a higher US dollar, and higher interest rates in the US and Europe. A continued improvement in economic conditions in the US and Europe may result in a substantial increase to the group's investment earnings. QBE has appointed highly regarded US insurance executive, David Duclos, to turnaround the US business. His appointment has been regarded by industry analysts as a real positive for the business.
- A turnaround in the US division is required in order for QBE to see earnings improvement. The US division makes up approximately 40% of QBE's written premium income and produced a loss in 2012. Recent restructuring initiatives and a stronger US economy should see the US business return to profitability.
QBE is currently undervalued as a result of substantial earnings upside from its US business expected in 2014, followed by a European recovery from 2015.
