Long-term shareholders in QBE Insurance Group Ltd (ASX: QBE) have experienced more volatility in their portfolios than most. Australia's largest global insurer was once a favourite amongst investors before the GFC but over the last few years it has fallen out of favour with investors thanks to multiple earnings downgrades and a large capital raising.
Since releasing its full year FY14 results in February, QBE looks like it finally may have turned a corner and investors are now showing more enthusiasm towards the company.
Here are a few points about QBE which might help determine if it should be in your portfolio:
Global Footprint:
QBE has a global footprint which helps to diversify its earnings base and spreads the company's risk exposure. More than 70% of the group's premiums are written offshore and a lower Australian dollar against foreign currencies will be a tailwind for the company going forward.
Earnings Momentum is Increasing:
It has taken several years, but QBE's earnings are finally gaining traction following major restructuring and consolidation of some of its poorer performing operations. Pleasingly for QBE, the insurance margin is heading in the right direction. The key measure of profitability increased to 7.6% from 5.5% a year earlier and management is forecasting this to increase to be between 8.5%-10% during FY15.
Fewer natural disasters recently has also helped QBE in maintaining its 2015 outlook which shareholders would be pleased about.
Stable Management:
The turmoil over the past several years has seen multiple management changes in key positions. It appears this may have finally settled and management can move forward and focus on the business at hand.
Increased Returns from Investments:
QBE holds over US$28 billion in investments and cash. As the graph below shows, the majority of this has been invested in low yielding investments such as government bonds and short term money. QBE is now moving to increase this allocation to growth assets and has a target of 15% by the end of 2015.
This growth asset strategy has already proved successful and QBE has stated that the FY15 net investment return should be well ahead of FY14 if there are no major shocks in the markets.
Rising US Interest Rates:
There is no doubt the prospect of higher yields on US Treasury bonds has contributed to the improved share price performance this year. While QBE is reducing its allocation to conservative investments, the group still has a sizeable investment in US bonds and a small increase in the yield will result in a substantial increase to the company's bottom line.
Foolish takeaway
While the insurance business is inherently risky and difficult to forecast, QBE is looking like it is heading in the right direction. I think the current share price is attractive to investors who are willing to tolerate some risk as there could be significant upside if QBE can meet or exceed market expectations.
