ASX code: QBE
Share price: $11.97
Industry: Insurance
Consensus forecast FY2016 Dividend: 62c
QBE Insurance is Australia’s largest global insurer, serving Australia, the US, Europe and the Asia-Pacific region, and is ranked among the world’s top 25 general insurers.
The group is going through a long-overdue turnaround in its business, having stumbled through a disastrous expansion strategy overseen by previous CEO Frank O’Halloran.
The initial steps of the turnaround driven by current chief John Neal included:

  • Improved balance sheet strength in 2014 via an institutional share placement ($650 million) and share purchase plan ($160m).
  • Divestment of poor returning businesses, including US and Australian agency businesses and an Argentinian workers compensation business.
  • De-risked the business via restructured and improved worldwide reinsurance treaties.

Mr Neal has now turned his attention to growth over the next three years with the recently released strategy update. This is aimed at generating 10 per cent compounding earnings growth and ROE expansion to 10 per cent. The key initiatives are:

  • $300m of expense savings out to FY18 focusing on simplifying the organisation and setting up a global procurement function. Total operating expenses in FY15 were $13.4 billion.
  • Simplifying and consolidating claims operations to release $200m in claims benefits.
  • Focusing on higher margin insurance lines, particularly in the US and emerging markets.
  • Further improving reinsurance rates by negotiating multi-year agreements and con­sol­idating covers.
  • Extending the duration of the investment portfolio to about 2.25 years by allocating up to 15 per cent of the portfolio to growth assets to achieve 3 per cent returns from the investment pool. By doing this, QBE gets a better yield on its investments, but it is more sensitive to increasing inflation/interest rates.

One result will be better operating cash flows, translating into a higher dividend payout ratio (65 per cent target) resulting in dividend growth outstripping profit growth.
QBE represents an attractive dividend yield of 5.2 per cent with upside on the successful delivery of the growth strategy. QBE is currently trading around our assessment of intrinsic value.
Stephen Wood is a senior analyst at Clime Investment Management.