Looking back, it's hard to understand how QBE Insurance Group Ltd (ASX: QBE) ever made its way into my carefully curated portfolio.
Perhaps it was the extremely cheap Price-to-Book value. Perhaps it was the naïve belief in a management turnaround.
Or perhaps it was simply the realisation that if the company was to more effectively deploy its billions in cash assets to higher risk investments (i.e. equities) it could create an absolute windfall for investors.
Regardless, at some point I hooked up with QBE Insurance and it was a mistake.
Today, several years on, in spite of write downs, divestments and a massive operational transformation program, QBE Insurance still doesn't come close to meeting the measures I consider for an attractive investment. Here are some of my biggest issues:
The company has terrible returns on equity
For the half year to 30 June 2016 QBE returned just 2.5% on shareholder equity. This is only one quarter the average return for U.S. listed companies to January 2016.
This isn't just a beat-up on the company's short term performance; the last five years have all been terrible. The company's own metric of 'Return on average shareholders' funds' for the last five years has not surpassed 7%. Insurance Australia Group Ltd (ASX: IAG) by comparison returned 10.3% on shareholder equity for the full year to 30 June 2016.
QBE has little discernible competitive advantage in a highly competitive industry
QBE makes money two ways: taking in insurance premiums and investing shareholder funds to produce returns. But from the company's poor historical performance it appears to have little competitive advantage in either pursuit.
In its 2015 Annual Report, QBE was at pains to point out that not only does it operate in a mature, low-growth industry, but that price competition to sneer rival customers is biting into returns.
One ray of hope is the company's huge global footprint which can help to distribute insurance risk. However even this has just served to bloat the company in years-gone-by, and gaining any valuable level of efficiency has been painfully slow.
Underlying business just not that good
There are some companies which, although they look ugly, have a hard-driving economic engine at their heart. To me QBE Insurance is not one of these companies. Yes, it take in billions and billions of dollars of written premiums, but compared to IAG, QBE's weak insurance margins don't signal a finely tuned machine.
Foolish takeaway
I look back on my time owning QBE and shake my head in dismay at the endless cycle of disappointment. But given there are so many other great fish in the ASX investment sea, I'm glad to have moved on to better things.
