The nature of insurance companies is rather simple. The insurer takes on the risk that companies and individuals do not want to carry, offering personal, commercial, health, travel and vehicle cover, to name just a few.
The person or business wanting cover pays an upfront premium, and the insurer then invests that money – known as the float – to make a return. In fact, it isn’t uncommon in the long term for an insurance company to actually realise a loss on collecting the premiums and then paying out for insured losses, and to predominantly make their money from their investments.
Most years for QBE Insurance Group (ASX: QBE) however, the company profits well in both regards. QBE is Australia’s largest general insurer, and one of the top 20 insurance companies globally in regards to net earned premium. With excellent management, a strong business model, and excellent customer service, QBE has proven itself a very strong corporation. Here are three other reasons why QBE could be a great idea for your portfolio.
Whilst a number of the ASX 20 companies, such as the big banks, Woolworths Limited and Wesfarmers Limited, have largely driven the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) up over the past 12 months, QBE’s share price has actually decreased by 2.6%.
The last few years have proven very difficult for insurers and reinsurers due to catastrophic events experienced worldwide. Following countless natural disasters in 2011, QBE – along with other insurers such as Insurance Australia Group (ASX: IAG) – were hit with enormous costs caused by severe drought conditions in the US affecting crop yields, as well as by Superstorm Sandy in October.
The value of QBE’s shares reflects these harsh conditions. Currently sitting at $13.20, shares have fallen from a high of over $35 in 2007.
Backed by the best
If QBE’s current value wasn’t enticing enough, it pays to know that the insurance sector is heavily backed by the world’s greatest investor, Warren Buffett. The nature of insurance is that there will never be a shortage of people wanting to cover the risk of great losses. If a company has a good management team with a solid business model and attractive premiums, they are bound to succeed.
Whilst the company’s 2012 full-year report presented fairly lackluster results in comparison to its 2010 year, net profit and revenue increased by 8% and 4% compared to 2011, respectively, showing that it is on the increase. Furthermore, after a fairly major business restructure, QBE hopes to save roughly $250 million annually in cost-cutting.
At today’s prices, the market has valued the company as though its best days are behind it. Whilst there have been a vast number of natural disasters worldwide in recent years, this trend is unlikely to continue into the long-term. As a well-run business with strong foundations, QBE Insurance Group makes for a very tempting long-term investment prospect.
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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman owns shares in NIB Holdings.
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