QBE Insurance Group Ltd (ASX: QBE) is in the business of risk. QBE Insurance makes money from financially protecting people and businesses from unlikely — but costly — events. These are called 'tail events'.
Are QBE Insurance Group (QBE) shares safe in 2017?
Unfortunately, as you can see in the chart above, QBE has done a poor job of insuring shareholders a decent return. Even with dividends, QBE Insurance shares have underperformed the market over the past five years. And going back 10 years from today, around the height of the global financial crisis, QBE Insurance shares were trading over $30 a piece. Now they are $12.44.
Of course, the market is forward-looking because if investing were as easy as looking at the history books librarians would make the best investors.
But insurance is not an easy business and decisions now and in the past can plague a company for many years, as they have done in QBE's case.
Basically, insurance businesses make money two ways:
- Assessing risk – they have 'actuaries' who use statistical techniques to determine the likelihood of events occurring and weigh them against variables like the sum insured to arrive at a premium. Needless to say, pricing your premium is not always easy. Sure, some actuaries are wicked smart and paid the big bucks, and regulations and reinsurance exist to help company's deliver on their promises. But pricing premiums is not an easy way to make money.
- Investing the 'float' – the premiums you pay today are put aside in either a rainy day fund for that period or put in an investment portfolio to grow over time. Think of this as a superannuation account or personal investing portfolio on steroids. Given the regulations and usual complexities of investing, it is not as easy as you may think to make money from these assets.
The point here is that insurance is tough. Look at the chart above, does it seem like each and every year has its own sets of triumphs and tribulations for QBE? To me it does.
Long-term investors can make huge dollars investing in insurance businesses, just look at Warren Buffett's Berkshire Hathaway (GEICO) in the U.S. or Markel Corporation. Given the complexity of its businesses and legacy issues, I don't believe QBE Insurance is in the same league.
Sure, QBE has undergone a simplification process and arguably set itself up for a brighter future. But, as with all insurance stocks, it also makes sense to wait for a major problem with both the premium side of the business and the investing returns before buying in — that's when shares will be cheapest.