Shares in global insurance business QBE Insurance Group Ltd (ASX: QBE) are closing in on a 52-week high today after the group provided a market update at an investment conference.
In 2016 the insurer posted a net profit of $844 million which was its best result since 2010 after many years of under-performance and write downs associated with the business over-extending itself in overseas markets.
Global insurers have faced something of a perfect storm over the last five years with pricing pressures on the premiums they can charge customers combining with rising levels of claims inflation.
Powering the recent storm has been the ultra-low global interest rate environment. This is due to the generally diabolical returns available from the insurers' capital floats that are invested in money market and other debt or cash synthetic instruments to generate investment returns for the business.
The tide may be turning though for QBE and its global insurance sector peers with US cash rates finally starting to rise and lifting the rates on benchmark debt rates with them.
Outlook
More important than the macro-environment is the underlying performance improvement of QBE that is being driven by a cost-cutting program and a higher adjusted combined operating ratio. This has led to higher dividends and the announcement of a $1 billion share buy-back that is likely to support the group's return on equity.
Today the stock sells for $12.97 and offers investors a reasonable mix of value and growth assuming you are comfortable with the argument that it will execute its turnaround strategy. The kicker to the investment case being the start of a cash rate hiking cycle in the US that could lift QBE's investment returns and profits over the medium term.
However, due to its mixed track record, multiple moving parts and the competitive pressures on insurance premium pricing I'm not a buyer of QBE shares. Especially when I could snap shares in the business below that I think has far stronger medium-term growth prospects…
