3 reasons of hope for QBE Insurance Group Ltd

This once great insurer might be down but it’s not out!

It’s been a torrid time being an investor in QBE Insurance Group Ltd (ASX: QBE). Unless you’ve had impeccable timing and managed to trade the stock on the occasional bounce or unless your holding period stretches back to the turn of the 21st century then you’ve unfortunately been underperforming the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).

For a quick recap – QBE’s share price is down 21% over the past 12 months, down 48% over the past 5 years and down 1% over the past decade. In contrast, the index is up 6%, 39.5% and 62% respectively over each of those periods. Likewise, domestic competitor Insurance Australia Group Limited (ASX: IAG) has a positive showing over each of those time periods too.

Despite QBE’s severe underperformance there are reasons to see brighter times ahead for the global insurance giant.

1)      Under previous management, QBE used to boast about the number of acquisitions it was doing – this of course (and in hindsight) was a warning sign. A side-effect of this long acquisition spree was a bloated global beast with an excessively large cost structure. New management now hold the reigns at QBE and they’ve set about streamlining and improving efficiencies within the organisation. This massive cost cutting drive is starting to realise benefits which will increasingly flow through to the bottom line in coming quarters.

2)      Sooner or later interest rates will rise. While unfortunately for QBE it might be later rather than sooner, at some point in the future interest rates will normalise to towards their long-run average. At this point the massive cash balances which the insurer holds will finally once again earn a more reasonable return than they have been.

3)      The concept of reversion to the mean is a powerful force in the world of investing. In 2013 QBE earned a negative return on shareholders’ funds – the first time it had sunk so low in 10 years. Taking an average of the past decade reveals an insurer which has regularly earned double digit returns on equity  – as the philosopher Horace said: “Many shall be restored that now are fallen, and many shall fall that now are in honor.” There’s good reason to believe that QBE will one day be “restored” but it could take a while.

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Motley Fool contributor Tim McArthur owns shares in QBE Insurance Group Ltd.

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