QBE Insurance Group Ltd’s cash profit slumps 39% – Is it a sell?

Global insurer QBE Insurance Group Ltd (ASX: QBE) has on Wednesday morning released its interim results for the 6 months ending June 30 and the market is not impressed!

In afternoon trade the share price slumped around 90 cents, or 8%, to $10.27.

Here are the key facts and figures investors need to know right now.

  • Gross written premium (GWP) flat at US$7.9 billion
  • Adjusted combined operating ratio flat at 94%
  • Underwriting profit down 5% to US$337 million
  • Cash profit after tax down 39% to US$287 million
  • Cash return on equity fell from 8.6% to 5.6%
  • Debt to equity of 33.7%
  • The interim dividend has been increased by 5% to 21 cents per share. The dividend will be 50% franked with QBE’s shares trading ex-dividend on August 25 with payment due on September 28
  • Management pinpointed pricing declines, heightened claims inflation and a deterioration in the compulsory third party scheme in NSW as factors causing a detraction in performance

What should investors expect next?

Management has provided the following guidance for the full year noting that they anticipate global pricing will remain under pressure in 2016.

  • GWP of between US$13.7 billion and US$14.1 billion
  • Net earned premium of between US$11.5 billion and US$11.9 billion
  • COR of between 94% and 95%
  • Insurance profit margin of between 8.5% and 10%

While some headwinds look set to persist for the remainder of 2016, the outlook for 2017 appears brighter with expectations that pricing increases will benefit the claims ratio on the Australian and New Zealand operations.

Foolish Takeaway

As a global insurer, QBE’s operations are much more diversified than domestic peers Insurance Australia Group Ltd (ASX: IAG) and Suncorp Group Ltd (ASX: SUN) which can be a positive as it means the insurance risk is more spread out.

Conversely, QBE’s operations are far more complex to understand and exposed to many harder to predict factors – this makes the investment analysis of QBE a complicated task.

Based on consensus estimates, QBE is trading on a price-to-earnings ratio of 14.5 times.

This multiple arguably looks attractive (if it can meet forecasts) for a major blue chip stock even after allowing for the fact that banks and insurers generally trade at a discount to the market multiple.

On the other hand, today’s result and subsequent share sell-off would suggest that analysts and investors are set to revise their estimates and valuation of the company downwards. It could be too late to sell QBE, but it might not be a buy yet either.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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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