Investors in QBE Insurance Group Ltd (ASX: QBE) have experienced a difficult time over the past five years after witnessing the share price tumble from over $25 in 2009 down to $12 today. The fall in the share price was on the back of several unexpected earnings downgrades which resulted in many investors losing patience with the company.
However, I believe now is finally the time to buy QBE shares as earnings are set to improve dramatically over the next three years, with this upside not captured in the current share price. QBE will grow earnings as a result of the following factors:
1) QBE will benefit from major restructuring and consolidation undertaken over the past three years, which will drive productivity gains and reduce costs. The company has stated that the cost reduction program should result in cost savings of approximately $250 million per year by FY15.
2) Insurance margins are improving from the near record low margins which QBE witnessed in 2012 and 2013 as insurance premiums rebound.
3) While QBE's Australian and New Zealand operations have been performing relatively well over recent years, the US and European divisions have been performing poorly. The US division accounts for approximately 40% of QBE's gross premium revenue. With US economic conditions improving significantly in recent times, the US division is set to improve and return to profitability, resulting in a huge lift to QBE's earnings.
4) Finally, increasing global interest rates, in particular in the US and Europe, will provide a significant lift to QBE's earnings as the company will start to earn a return on its large cash pile.
