Many investors have been left scratching their heads over the rapid rise in shares of QBE Insurance Group Ltd (ASX: QBE) over the last few weeks.
Shares have rocketed almost 20% since the start of the year, adding 2.5% on Friday alone while fellow insurer Insurance Australia Group Ltd (ASX: IAG) climbed 1.8% and the S&P / ASX 200 (Index: ^AXJO) (ASX: XJO) closed down 0.9%. So what's the company's secret?
Above: QBE's rapid share price rise. Source: Yahoo Finance
The secret
Just like the New Zealand cricket team; after years of excuses and under underperformance QBE has finally returned to form and is on track to grow earnings for shareholders.
QBE Insurance announced last month it had returned to profitability and is positioned to produce "stable and predictable earnings" going forward. For the 2014 financial year (FY14) QBE produced a 28% jump in insurance profit and reversed the loss in earnings per share (eps). This is great news for shareholders and is proof many investors needed that the company can live up to its goal of turning performance around.
A second, less obvious, reason investors have flipped a switch on QBE is the company's assertive new stance on investing the billions of dollars in investment assets the company holds on its books. QBE had over US$28.5 billion in investment assets at 31 December, 2014, yet produced a pitiful total net-return on the amount of just 2.6%.
The change in strategy means that QBE will increase the percentage of higher yielding assets (like equities) that it owns which, if prudently managed, will mean a higher return on assets for investors at little cost.
Is it too late to buy?
QBE's recent share price run suggests the strong earnings and new strategy have caused the market to 're-rate' the value of the company. The new share price seems fair in my view given earnings are expected to continue to improve over the next two years, but the company would not be at the top of my 'buy' list.
