QBE Insurance Group Ltd (ASX: QBE) has had a shocking run since 2008 following a string of poor financial performances and profit downgrades. The share price has fallen from $35 in 2008 down to $11 today. However, can the company finally recover its glory days and reward investors who have witnessed the value of their holdings fall significantly?
Despite the recent poor economic performance, QBE has a strong and robust global business model which is highly leveraged to a stronger US economy and higher long-term interest rates in the United States and Europe. The large US business remains a problem for the company, however major restructuring measures have been implemented in an attempt to turnaround the US operations. As these factors materialise over the coming years, QBE is poised to see a significant increase to earnings.
Furthermore, the underlying business should continue to improve as insurance margins increase and premiums are raised. A series of natural disasters between 2011 and 2013, along with lower investment returns and costs associated with implementing acquisitions substantially reduced insurance margins. Insurance margins should improve in the medium term.
QBE is also implementing a cost reduction program which is forecast to reduce operating costs by $250 million per year.
Following yet another earnings downgrade in July of this year and capital raising in August, QBE management cannot afford another earnings disappointment. In my view this is unlikely and I believe there is substantial upside to the current share price over the medium-to-long term.