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Are QBE Insurance Group Ltd shares cheap?

Could it be true? Could the worst be over for QBE Insurance Group Ltd (ASX: QBE) shareholders?

Moody’s Investors Service earlier this week released a report titled “QBE Insurance Group Limited — Strategic and Capital Initiatives Improve Balance Sheet and Earnings”, which concluded that QBE’s “business performance will improve and become less volatile, because of the significant operational and financial actions that it has undertaken over the last two years”

The investment house, which provides credit ratings, research, tools and analysis that contribute to transparent and integrated financial markets, sees a number of benefits to QBE’s strategy, including:

  • Strengthening of the group balance sheet to reduce volatility
  • Retaining its low-risk investment strategy to protect investors
  • Focus on the international business components that have hampered performance in the past
  • cost savings of around USD250 million through various initiatives
  • shifting of strategy from acquisition-led to outright dominance in a number of key markets

What does this mean for investors?

In theory, this means that investors can start to rely more heavily on the group’s forecasts of profit and insurance margin. Despite intense competition, QBE is expected to be well on its way to achieving the 2015 forecast of:

  • gross written premium (GWP) between US$15.5bn and US$15.9bn,
  • net earned premium (NEP) between US$12.6bn and US$13.0bn,
  • a combined operating ratio (COR) between 94% and 95%, and
  • an insurance profit margin of between 8.5% and 10%.

Big profits, big dividends

All of this should see the group’s dividend payment increase by as much as 25% year-on-year, as the group targets a higher payout ratio now that the majority of the balance sheet issues have been sorted.

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Motley Fool contributor Andrew Mudie owns shares of QBE Insurance Group Ltd.. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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