As shareholders in insurer QBE Insurance Group Ltd (ASX: QBE) are well aware, the stock has been a disastrous investment over holding periods ranging from one to 10 years. In fact you have to go right back to 2002 to reach a point where a buy-and-hold investor has outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) by owning QBE stock.
Incidentally, over both one year and 10 years Insurance Australia Group Limited (ASX: IAG) has also underperformed the index, although over five years the stock has outperformed, registering a 60% gain versus a 54% gain from the S&P/ASX 200 Index.
While the returns from QBE are far from impressive, as investors it's important to assess a company based on its future potential and not just its historical performance. That future potential of course isn't solely about the outlook for business performance, it is also a consideration of the outlook for investment performance based upon a company's valuation and the potential discount or premium a stock may be trading at to your valuation.
So while it would appear that 'the bears are in charge', with the market taking a pretty dim view of the outlook for QBE, here are a few reasons to be bullish that the future could be brighter for the insurer.
Firstly, management has been candid and acknowledged failings in the group's operations and has set about implementing an agenda for change. These initiatives include: a focus on QBE's core businesses in which it has world-class operations; utilising QBE's global footprint to achieve economies of scale to enhance profit margins; a renewed focus on capital allocation; and only growing in areas where management believes a leadership position can be achieved.
Secondly, on top of a more conservative approach to business operations under QBE's current management is the powerful force of reversion to the mean. In 2013 the insurer wrote a similar level of business as it did in 2011 and 2012. These levels (approximately $18 billion) represent record levels for QBE. Now, while writing business and earning profits are two very different things, if one reviews the 10 year history of QBE's earnings, margins and returns on equity it would appear that there is plenty of scope for a lift from what appear to be very depressed levels.
Foolish takeaway
With the stock price at $12.75, QBE shares are trading much closer to their 52-week low than their 52-week high. This brings me to the third reason to be bullish – it appears that QBE is currently being valued by the market as though profits will not recover from current levels. While it may take time for the benefits of the restructuring program to take effect there are definitely reasons to be bullish that QBE Insurance can boost future earnings which should see the share price rise accordingly.
