Why QBE Insurance Group Ltd could be a buy at its current share price

It has been a very disappointing 6 months for investors of QBE Insurance Group Ltd  (ASX: QBE), which as of Friday’s market close sat a full 30% off its July high of $15.

The sell-off now means that QBE is trading at a lower forward price-to-earnings ratio than competitors Insurance Australia Group Ltd (ASX: IAG) and NIB Holdings Limited (ASX: NHF). This also means that the shares are yielding a dividend of 4.5% at present and 6.7% based on the predicted 71.7 cents dividend analysts are expecting the company to pay out in fiscal year 2016.

The company has a diverse business with operations all over the world. There isn’t one particular geographical location that the company operates in that accounts for more than a third of its revenue, which should go some way to limiting its risks. Further to this, commercial and domestic property insurance (which contributes 42% of premiums) is the largest segment by far, but not too large to make it too much of a risk.

According to CommSec, the brokerage arm of Commonwealth Bank of Australia (ASX: CBA), analysts are expecting earnings to grow from 82.6 cents today, to 103.4 cents in 2016 and then 114.3 cents by 2017. This earnings growth should allow for the possibility of share price gains for investors, on top of the aforementioned fully-franked dividend which is growing at a similar rate.

The company should be able to achieve its earnings growth through its plans to improve profitability in the United States by focusing on its underwriting performance, as well as its plans to drive organic earnings growth in the 4 to 5 per cent range through improvements in retention levels and upselling.

Because approximately a third of the company’s revenue comes from its United States operations and 20% of premiums earned derive from agriculture, this does of course expose it to risks posed by the powerful weather systems caused by El Niño. To combat this it has bought around a billion dollars worth of protection against catastrophe claims which it feels is more than adequate.

I feel this could be a risk worth considering before making an investment in QBE. However, if the protection is not enough the company does have the option of raising premiums to compensate. While nobody likes premium increases, in my experience they are a bit easier to swallow following a catastrophic event, so the company should be able to pull through reasonably well.

Foolish takeaway

I feel at the price the QBE shares are trading at right now, they are certainly worth considering for a long-term investment. The potential share price gains and the attractive fully-franked dividend it pays out could prove to be market-beaters in the next couple of years.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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