The latest results from QBE were hardly glowing. Australia's second-largest insurer reported a $US254 million ($271 million) net loss for 2013 on the back of operational issues and write-downs at the company's troubled US division. The large loss compares with last year's profit of $US761 million. The company's cash profit came in at $US761 million compared with a December forecast of $US850 million, caused by one-off restructuring costs.
The shares, however, rallied on the results as there was relief no more skeletons were revealed, and the red ink had already been flagged to the market.
Outlook There have been a number of false dawns for QBE over the years, but we believe the latest set of results could mark the nadir for the insurer. Management is well aware the US business has not been performing effectively and has implemented actions to ensure the division won't bring any more major negative surprises. Mistakes here arguably lay with previous senior executives and we are optimistic that the relatively new head, chief executive John Neal, has cleared the slate following a review of the US operations.
Management is also overseeing a major transformation program, which is on track to deliver annual cost savings of at least $250 million by the end of 2015.
North America aside, QBE's other four divisions are performing solidly, and are leveraged to an upswing in the premium cycle. Management is forecasting that rates will increase by 2.5 per cent on average in 2014 and more than offset any uptick in claims.
A low duration, fixed-interest portfolio, meanwhile, leaves QBE well placed to deliver improved investment returns as interest rates rise in the years ahead.
Price The share price performance of QBE has been disappointing, with shares down 10 per cent and 5 per cent over the past six and 12 months, respectively. Investor sentiment towards the stock has been severely tested in recent times because of earnings shocks and impairments, most of which came from the previous management's acquisition strategy.
Worth buying? With the decks largely cleared of legacy issues, there is every prospect that we have seen the bottom of QBE's earnings cycle. As such, we do not regard a prospective earnings multiple of 13.8 times, falling to 11.6 times for 2015, as demanding. The shares are also supported by a fully franked 3.6 per cent dividend yield.
Consequently, we believe the stock is worth buying at current levels for those investors with a medium to long-term investment horizon.
Greg Smith is the Head of Research at Fat Prophets sharemarket research. To receive a recent Fat Prophets Report, call 1300 881 177 or email info@fatprophets.com.au.
