Investors in QBE Insurance Group Ltd (ASX:QBE) have been through a tough time since 2008 as the company's share price fell from $35 down to $11 today. However, can the business recover its glory days and reward patient investors?
QBE looks to have significant upside as a result of major restructuring and consolidation undertaken in 2013 and 2014 and I expect strong earnings growth over the next couple of years. CEO John Neal has stated that the recent restructuring initiatives are performing well.
QBE's strong business model is highly leveraged to a stronger U.S. economy, a higher U.S. dollar and higher long-term interest rates in the US and Europe. As these factors materialise over the coming years, QBE is poised to see a significant increase to earnings.
Furthermore, the underlying business should continue to improve as insurance margins increase and insurance premiums are raised. A series of natural disasters between 2011 and 2013, along with lower investment returns and costs associated with implementing acquisitions substantially reduced insurance margins. Insurance margins are set to improve in the medium-term.
QBE is also implementing a cost reduction program which is forecast to reduce operating costs by $250 million per year.
Following another earnings downgrade in December 2013, QBE management cannot afford another earnings disappointment. Another downgrade would likely set the company's shares plunging. In my view this is unlikely and I believe there is substantial upside to the current share price over the medium term.
