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QBE Insurance Group Ltd reports $US1 billion profit turnaround: Is it time to buy?


Insurance heavyweight QBE Insurance Group Ltd (ASX: QBE) today announced a huge profit increase for financial year 2014.

In the 12 months to 31 December 2014, QBE reported a 6% drop in revenue, to $US18.23 billion, with a profit of $US742 million, up from a loss of $US254 million a year earlier. This follows a recovery in its North American operations and the non-recurrence of impairments.

Earnings per share increased to US55.8 cents from negative US22.8 cents in 2013. Net tangible assets rose sharply from $US4.70 to $US5.30 per share.

A final dividend of 22 cents per share, fully franked, was declared and is payable on 13 April 2015.

Despite QBE’s announcement of lacklustre results in the first half of the 2014 financial year and its intention to strengthen its claim reserves in Latin America by nearly $170 million, it achieved an operating ratio of 96.1% and insurance profit margin of 7.6% (up from 5.5% in prior period) over the year.

As promised it continued to strengthen its balance sheet following the oversubscribed placement of $780 million worth of shares earlier in the year. Last month it announced it would sell its US agency businesses for $US300 million, whilst earlier this month it said it had agreed to sell its Australian agency businesses for as much as $348 million.

As a result of the $US1.5 billion in cost savings, QBE’s debt to equity ratio fell from 44.1% last year, to 32.5% at 31 December 2014, with expectations of further reductions throughout 2015.

In a separate announcement to the ASX this morning, the company also said it had entered into an agreement to sell its Argentine Workers’ Compensation business to a subsidiary of the Werthein Group for $US95 million, representing approximately 1.7 times book value.

Summarising the group’s performance in turning around its operations, CEO John Neal said, “I am encouraged by the huge progress we have made during 2014. Our business is more streamlined, more focused and in far better shape to compete strongly in increasingly competitive conditions.”

He added: “While there are remediation activities still underway, our transformation is largely complete and we are well placed to deliver further improvement in performance and efficiency and meet our published targets in 2015.”

Looking ahead in 2015, QBE is targeting gross written premium of between $US15.5 and $US15.9 billion, net earned premium of $US12.6-$US13 billion with a combined operating ratio of 94-95% and an insurance profit margin of 8.5-10%.

Should you buy QBE shares?

Given the complexity of QBE’s operations, coupled with its geographical spread, many investors put it in their ‘too hard’ basket and instead go with simpler insurance stocks like Suncorp Group Ltd (ASX: SUN) and Insurance Australia Group Ltd (ASX: IAG). However for investors willing to do their research QBE could prove to be a sound contrarian play. At today’s market price, its shares offer a 3.2% fully franked dividend yield.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. Owen welcomes your feedback on Google plus (see below) or you can follow him on Twitter @ASXinvest.

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