Two years ago when I bought shares in QBE Insurance Group Ltd (ASX: QBE), I thought I got a great deal.
The company had just been hit hard in the U.S., first by the devastation of Hurricane Sandy and then by one of the worst U.S. droughts for 50 years which hammered crop insurance.
Shares hit a low of $10.47 which looked cheap relative to the company's book value and given the hit to earnings should have been temporary.
Indeed, in spite of the year's huge catastrophe claims Chairperson Belinda Hutchinson declared the outlook for 2013 was for "a significantly improved return on shareholders' equity".
And for a short time it looked like she was right.
A crumbling empire
However just 10 months later QBE Insurance Group looked more like Napoleon's crumbling European empire than a global force in insurance.
The current QBE Group was pieced together with acquisitions from around the globe in an ambitious attempt to conquer the insurance world.
In the company's 2012 Annual report Group CEO John Neal declared:
"There are few insurance and reinsurance businesses in the world today that have QBE's global reach… With operations in 48 countries, we provide insurance to policyholders in more than 140 countries… We are well positioned for future success."
Fast forward to 2014 and the company has produced its lowest half-year interim net profit in five years, has announced an $810 million capital raising and is selling off assets. For investors this positioning has been an abject failure.
The question now is whether QBE can fix its tattered reputation and performance, something Napoleon never properly achieved after invading Russia in 1812.
A long-term investment bargain
There is no denying QBE has squandered recent good market conditions while other insurance companies like Insurance Australia Group Ltd (ASX: IAG) have flourished. But if QBE can truly secure its operations and fulfill its potential, it could represent a long-term bargain.
There are two important drivers which give me hope:
- A long overdue change in investment strategy to increase risk exposure from around 2% of the company's investment portfolio to around 15%
- The operational transformation program, which is still expected to deliver annual expense savings of US$250 million per year.
If both of these points work in the company's favour, QBE could return to producing adequate returns and rewarding shareholders for their patience.
So which is it?
QBE's successful future still rests on a lot of 'ifs'; and this means a level of uncertainty that very rarely translates to investment success. QBE may prove to be an absolute bargain in the long term, but with its average reputation and so many better performing companies available, why take the risk?
