QBE’s tough year


It has been an eventful year for QBE Insurance (ASX: QBE), with the share price rising 4% for the calendar year but underperforming the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), which is up nearly 11%.

To reach that 4% rise, shareholders have been on quite a rollercoaster ride — and what a difference a few days makes! Had you purchased the stock on the 16th of January (as opposed to owning it on the 1st of January), your returns from QBE would be over 22% compared with a 7% return from the index!

This difference is due to the deeply discounted capital raising QBE undertook at the beginning of the year. Arguably, poor management at QBE led to the balance sheet being over-stretched, and as a result shareholders were forced to stump up more cash. Soon after the capital raising, long-serving CEO Frank O’Halloran announced his departure.

The raising and O’Halloran’s departure were just two of many events that have put pressure on QBE’s business and share price this year. Its recently established position in the US Crop Insurance sector suffered due to a severe drought in the USA, leading to numerous policyholder claims. That, combined with the 2011 adverse weather events around the globe that QBE was exposed to, have reduced the Minimum Capital Requirements (MCR) to a level that makes some investors uncomfortable.

To counter this, management, led by newly appointed CEO John Neal, has recently conducted an investor road show to New York and London to further explain QBE’s global businesses to analysts and fund managers. Providing more clarity around performance and how the businesses are tracking is important to easing investor concern.

Understanding the financial accounts of insurance companies requires a lot of time and skill. This can make smaller, less complex insurers, such as Calliden (ASX: CIX) and NIB Holdings (ASX: NHF) a better place to start. However, it is important to also consider that insurers need rock-solid balance sheets — which is sometimes lacking in the smaller players.

The Foolish bottom line

The past performance of QBE is very impressive as a profitable underwriter of insurance with high margins and high growth. The combination of low yields on funds invested and adverse weather events have at least temporarily hurt these margins and growth rates. Time will tell whether the business can return to its historic rates.

For the investor the primary question is: “what is the value of QBE?”

As QBE has grown more complex, understanding the business is an immense task. Even the well-respected team at Cooper Investors, which had owned and followed QBE for many years, sold their stock in September 2011, respectfully acknowledging that they could no longer accurately value the business due to its complexity. This is a great example of humility — and an important attribute for Foolish investors to emulate.

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Motley Fool contributor Tim McArthur owns shares in QBE, Calliden and NIB. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription. This article contains general investment advice only (under AFSL 400691).

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