The latest full year result from QBE Insurance Group Ltd (ASX: QBE) suggests the company is finally moving past its torrid period of performance and is "returning to stability and strength". Phew!
As an investor in the company through much of this period it has been a wild ride, but there are three valuable lessons I have learned:
#1 Insurance is essential, but it's also a commodity
Insurance is an essential service; it provides protection and reassurance and it was a price I was glad to pay when my car was recently stolen (and crashed).
However, insurance is also a commodity with very little differentiation between suppliers. Without a natural competitive advantage insurance companies are forced to compete on price, which is a dangerous business model to invest in.
To counter this and deliver growth for investors, insurance companies have a habit of making acquisitions or buying their way into a market. Insurance Australia Group Ltd (ASX: IAG) is a good example with some 17 different brands across Australia, New Zealand and Asia.
QBE in particular embraced this strategy, which leads us to the second thing I've learned from owning QBE Insurance…
#2 Growth, in and of itself, is not a good thing
Growth is generally seen as a good thing. But as QBE insurance has illustrated, growth is a waste if it does not add value.
When done methodically and for the right reasons these acquisitions can be a huge asset to investors. NIB Holdings Limited's (ASX: NHF) entry into New Zealand through the purchase of TOWER Medical Insurance Limited in 2012 looks to be one example.
However, when rushed or approached with over-zealousness it can easily destroy shareholder value. After a prolonged acquisition spree QBE investors were faced with this reality when value failed to materialise and acquisitions began dragging the company down like dead-weights, resulting in years of retrenchment.
#3 A 'float' is only as good as the management in charge of it
Holding billions of dollars from insurance policies is a key attraction of investing in insurance companies. However this 'float' is pointless for investors if there is no strategy to maximise returns.
QBE had more than US$18 billion in investments backing policy holder funds at 31 December 2014, but due to the company's cautious investment approach it yielded a pitiful 2.6%. QBE has started increasing the weight of total growth assets going forward, but it comes far too late for many investors.
Would I buy QBE Insurance today?
QBE has turned its performance around strongly compared to the prior two years and is now a leaner, and meaner, insurance machine. The shift to holding more growth assets is also a big win for investors, and if the company can continue this form it could offer reasonable value at current prices.
