The share price of QBE Insurance Group Ltd (ASX: QBE) has fallen 28% in the last 6 months compared to a 9% drop in the S&P/ASX 200 (Index: ^AXJO) (ASX:XJO) index that it's a part of.
What's happened?
From a high level, investors could assume that it has something to do with the 20% fall in net profit reported by close rival Insurance Australia Group Ltd (ASX: IAG), or perhaps a major natural disaster in the US or Australia.
Wrong!
While there have been issues in the US related to major snow storms and devastation by massive bushfires in Australia, analysts don't believe they will make any meaningful difference to QBE's bottom line.
Rather, as my colleague pointed out earlier this week, QBE's share price movement is more a reflection of the global outlook for interest rates than anything else. Let's take a quick recap; 12 to 18 months ago QBE's management team noted that returns on the company's massive cash balance (comprised of forward-paid insurance premiums) were well below (around 2%) what they'd ideally like (much more than 2%).
Why?
This problem is not confined to just QBE. Investors need only look at another ASX blue-chip, Computershare Limited (ASX: CPU), to see the impact that the delay in the rise of US rates can have on net profit.
The tumultuous start to the year, as a result of the falling oil price, conflict in Syria, crashing markets, and general uneasiness, has seen big investors flock to the safety of government bonds. This increases the price of bonds and therefore decreases the income return on them (like shares, the yield on bonds falls as the price rises).
So is there any hope?
Unfortunately for investors, assuming the company's insurance operations are ticking along without any major incidents (internal or from disasters), we have to sit and wait for an improvement in interest rates before the share price will move meaningfully higher.
This, however, is one of the reasons why I still like QBE as an investment. While the insurance market appears to be close to its peak of competitiveness, QBE still has a major lever to pull in the future to grow profits. Management has already revealed a desire to increase the risk of the portfolio to grow returns, however, it's unclear if we'll see any results from this when the report comes out on February 23.
