How does QBE stack up?

One of the issues the insurance industry faces is that it sells what can best be described as a ‘commoditised product”. From a practical point of view, this term refers to the fact that most consumers don’t care who they buy their insurance from, all they care about is the price.

As most readers have experienced when their annual house or car insurance policy comes due, after a call to your broker or a quick comparison online, a few insurers offering the same level of cover are identified and then the lowest price wins.

From an investor’s point of view, this “commoditisation” of insurance makes comparisons with other insurers critical. Comparative analysis can help to identify a company that may for some reason have a sustainable competitive advantage, such as a market niche or a lower cost to serve and likewise, can identify a poor performer that may have problems down the track.

QBE Insurance (ASX: QBE) is often compared to its two main Australian competitors, Insurance Australia Group (ASX: IAG) and Suncorp Group (ASX: SUN). Given that QBE writes around 25% of its business in Australia and New Zealand, this comparison is not unreasonable, however, given the expansive global operations QBE has, a wider sample is more useful.

For many years (until its latest 2012 results) management has provided details in its year-end presentation, which outlines QBE’s performance relative to its peers based upon its combined operating ratios (COR). These peers include major global players such as Allianz SE (ETR: ALV), Zurich Insurance Group (VTX: ZURN) and Swiss Re (VTX: SREN). Unfortunately, it appears management has stopped including the slide, however, the information is publicly available, so investors can attain the information themselves. (See below for the most recently available slide).

Not only is a comparison of operating metrics a worthwhile analysis to undertake, but so is a relative valuation of listed peers. Of note, QBE’s listed peer group all appear to be trading on much lower, indeed many are on single digit, price-to-earnings multiples compared with QBE. This suggests the rest of the world is valuing insurance companies less optimistically that Australian investors at present.

qbe chart

Source: QBE

Foolish takeaway

The fact management has stopped including a slide it has long provided should be a red flag. Insurers are complicated businesses and investors need to dive deeply into their accounts to garner a full understanding of each business.

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Motley Fool contributor Tim McArthur owns shares in QBE Insurance.

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