QBE cops a hiding

QBE investors need to weigh up the benefits flowing through from the company's rehabilitation with the broader problems facing the industry

It doesn’t pay to disappoint in this kind of environment.

After months of being lauded for rehabilitating QBE’s overburdened balance sheet, John Neal this morning felt the sting of an investor backlash at a less than stellar result as the stock plummeted 9% at the opening bell.

Foreign buyers have been pouring into the stock along with previously disillusioned domestic investors, buoyed by the idea that investment earnings would benefit from a lift in US treasury yields coupled with the boost from a weaker Australian dollar (see my earlier piece Recalibrating into the dollar's downturn). That’s driven the stock 56% higher in recent months.

But not only was the $447 million half-year result around 37% below last year, it was way below the $555 million that most analysts were predicting.

QBE’s major operation is North America, from which it derives around 30% of its income.

But premium rate increases were not as aggressive as expected and investment income failed to live up to expectations.

Compounding the problem, the dividend payout ratio, while steady at 50%, has delivered a much skinner reward, at 20c, than anyone anticipated.

From an investor’s viewpoint, the problem with QBE is more fundamental. It fits somewhere between a defensive and a growth stock. And while it has tried to be all things to everyone, in recent years it has failed on both counts.

On a broader scale, the structural problems facing the entire insurance industry need to be weighed against the positives flowing from the rehabilitation and rebuilding of QBE.

The company has overhauled its operations, primarily through cost-cutting, offloading staff and driving efficiencies which, when added to the turnaround in its investment and forex positions, has driven much of the optimism around the company.

But the global insurance industry is facing difficulties. Customers aren’t renewing policies and increased competition has seen margins crimped. Underwriting performance remains an issue.

Clearly, investors swept up the euphoria of recovery got a little ahead of themselves. QBE still looks positive. But the improvements will take longer than anticipated.