Global insurer, QBE Insurance Group Ltd (ASX: QBE), has promised to deliver the prospect of great returns to investors over the past five years, but as the graph below highlights, it has fallen well short of investor expectations.
No matter how well the underlying underwriting business seems to perform, there always seems to be an unforseen event that impacts investor sentiment and pulls the share price lower.
For example, QBE shares have fallen by more than 11% since the shock Brexit vote.
By now, investors would be aware that the insurance sector is notoriously difficult to predict and the insurers themselves are unable to control a number of factors that directly impact their profitability.
Nevertheless, with a market capitalisation of $14.3 billion, QBE is likely to remain a popular stock amongst investors looking at the big end of town.
For those investors interested in QBE, here are three reasons that could make that decision to buy or sell the shares a little easier:
BUY
- QBE's core underwriting business is showing signs of operational improvements thanks to divesting poorly performing portfolios and cost-cutting measures. This should set the company up for better returns over the long term.
- The company's balance sheet is far stronger today than it was just a few years ago and this will help QBE to withstand any unforseen shocks.
- Although it has been unreliable in the past, there is growing confidence that QBE will be able to increase its dividend over the next few years. Based on the current share price, analysts are forecasting a dividend yield of 5.7% and 6.5% over the next two years.
SELL
- The shock Brexit result may have a lasting impact on the insurer as 29% of its premiums are written in the UK and Europe. Changes to the EU's passporting rules, along with a possible slowing of economic growth in the region, could continue to dampen investor sentiment in companies exposed to the region.
- The prospect of interest rates in the US remaining on hold for longer means it will take longer for QBE to earn a growing return on its US$28.5 billion investment portfolio. This means the share price may remain subdued irrespective of how well the underwriting division performs.
- The global insurance market has become more competitive over the past few years and this has resulted in subdued year-on-year premium growth. This competitive environment will make it harder for QBE, and other insurers, to implement premium price increases and this could have a negative impact on profitability.
Foolish takeaway
There are a number of reasons why an investor may choose to buy, hold or sell QBE shares at the moment, and I think investors could be forgiven for avoiding the shares altogether.
While I have been bullish on QBE in the past, I feel the share price could remain under pressure in the short term. As a result, I will be watching this space closely for further developments.
