Shares in global insurer QBE Insurance Group Ltd (ASX: QBE) have rallied to 52-week highs following Donald Trump's shock election victory on 8 November 2016. In total, QBE's shares jumped a whopping 34.5% over the last two months, almost doubling the gains of Australia's second largest insurer IAG Australia Group Ltd (ASX: IAG) in the same period.
The outperformance by QBE appears to be a by-product of rising global interest rates and QBE's international focus. The key question on investors' lips, however, is whether this outperformance can continue?
Here's why I think it can.
QBE's diversification
Unlike IAG and Queensland-based Suncorp Group Ltd (ASX: SUN), QBE's strength lies in the breadth and diversity of its operations.
In its 2016 half-year report, QBE reported it derives 34.7% of its gross written premiums from North America alone. When including European numbers, QBE's two largest geographic divisions account for a massive 65.7% of gross written premiums at a group level.
Nonetheless, QBE's Australian and New Zealand operations remain its most profitable segment, accounting for over 45% of the group's net profit before tax.
Group outlook
It is not ideal that QBE's Australia and New Zealand operations are its most profitable divisions (in absolute terms), however, investors should be comforted in knowing that QBE has taken proactive steps to regain momentum in its North American and European operating units.
Following years of underperformance, QBE has sown the seeds for profitable growth in Europe, demonstrated by its outstanding combined operating ratio of 88.3% in the region. Furthermore, management has rebased QBE's US operations through divestment of non-core assets and a renewed focus on costs.
Accordingly, investors should expect to see continued improvement in both regions when QBE releases full-year earnings on 27 February.
Margins
An aspect to look out for when QBE releases results is the group's profit margin. Management previously indicated it expects a reduction in gross written premiums due to market pressures. However, management believes its insurance profit margins should be unchanged.
Therefore, I believe QBE's shares should surge if it can manage to maintain or beat its prior guidance of 8.5% to 10% insurance profit margins.
Foolish takeaway
Even if QBE fails to beat margin forecasts, the nascent US recovery and prospects of rising interest rates in the US provides for a solid backdrop for sustainable growth in my opinion. Though adverse natural disasters or shock profit write-downs could derail the growth story, I regard QBE's current price-earnings ratio factors in a margin for error.
Theref0re, with the stock paying a handy trailing yield of 4% (partially franked) – which is likely to grow – long-term investors should take note and consider buying QBE ahead of other financial 'yield plays' like Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB).
