The share price of QBE Insurance Group Ltd (ASX: QBE) is down by nearly 16% in the last 12 months, making it the worst performer of the big three Australian insurers by some distance. During this period its rivals Suncorp Group Ltd (ASX: SUN) has been flat and Insurance Australia Group Ltd (ASX: IAG) has gained around 6%.
But in my opinion the next 12 months will be a different story. I expect a revitalised QBE Insurance will produce better bottom line growth and stronger returns than its two rivals, thanks largely to the strong performance of its North American operations.
The North American business of QBE Insurance has in recent times been the company's problem child. It was thoroughly underperforming, losing money, and dragging the whole company down with it.
A key measure of profitability for insurers is the combined operating ratio. A combined operating ratio under 100% means profit, and above it means a loss. Just two years ago the North American segment's ratio had been as high as 111%. But in fiscal 2015 the segment managed to bring its combined operating ratio down to 99%.
Thanks to this improved performance the US$5 billion segment is now its great hope for future growth. Furthermore, QBE Insurance is hoping to source around US$1 billion worth of gross written premiums from the US$85 billion specialty insurance market in the United States. This type of insurance will typically cover cyber liability, surety, and inland marine risk. So far the early progress has been positive and it has written just over US$400 million worth of specialty risk.
Whilst the growth may be expected to come from the United States, the company is so much more than just this one segment. I have always felt that the diversity of its business sets it apart from its competitors. With no region accounting for more than a third of its total gross earned premiums, the company could be exposed to lower levels of overall risk.
The shares are changing hands at around 16x trailing earnings at present, which makes them about fair value in my opinion. But with analysts expecting earnings to grow at 9% per annum for the next couple of years, I believe there is potential for decent share price gains ahead.
An added bonus will also be the estimated fully franked 5.1% dividend it is expected to pay in its current fiscal year. Not only is this an above-average dividend already, it is expected to grow by 14.5% per annum through to FY 2018.
Because of this I believe QBE Insurance is a good investment today. But as diverse as it may be, it will never be able to mitigate all risks completely. Adverse natural disasters and write-downs could affect its profitability in the future. So I feel investors ought to weigh up these risks before deciding whether to invest in QBE Insurance today.
