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Can shareholders expect capital returns from QBE Insurance Group Ltd?

Troubled insurer QBE Insurance Group Ltd (ASX: QBE) is trying to follow the footsteps of our Big Banks to regain trust with investors, and its share price action yesterday indicates that the strategy might be working – at least for now.

QBE’s new chief executive Pat Regan is trying to break the “QBE Curse” by indicating that the group will be embarking on a programme of divesting non-core and underperforming assets. The insurer has a long history of disappointing shareholders on the earnings front.

I remember talking to experts on QBE in 2012 when I was a journalist who would privately admit to me that they don’t understand some aspects of QBE’s businesses as the group had grown too complex. One even called the insurer a “black box” before joking about Enron Corporation.

This is probably why the market reacted positively to management’s profit warning yesterday as I can’t think of another blue-chip more in need of a “simplification” programme than QBE.

The stock had initially crashed 6% to $9.86 before finishing near its intra-day high of $10.43. This was still a 0.6% drop from the previous day’s close but it does show that investors are willing to back Mr Regan and buy the dips even after he said that the company would post a net loss of US$1.2 billion for calendar 2017 due to a string of disasters such as hurricanes to wildfires in the US.

The market has been expecting bad news with QBE’s shares priced at roughly a 20% discount to global peers. New CEOs tend to get all the bad news out early in their tenure so they can be measured on the next few profit announcements.

QBE’s decision to take a leaf or two out of the strategy book of the Big Four banks is a positive. Australia and New Zealand Banking Group (ASX: ANZ) selling of its Asian assets to improve its return on equity is seen as a positive by the market and gives the bank the firepower to expand its capital return program, which includes share buybacks.

ANZ has been more aggressive than the other three Big Banks and is seen as the only one with the balance sheet flexibility to increase its capital return initiatives, although that could change later this year if National Australia Bank Ltd. (ASX: NAB) and Commonwealth Bank of Australia (ASX: CBA) divest their funds management businesses, as speculated (click here to find out why this is such as bullish sign).

The Big Four, which also includes Westpac Banking Corp (ASX: WBC), are facing growing headwinds from a tough operating environment and their divestment program to focus on capital returns is the only reason why I have not abandoned the sector.

This is exactly the path QBE needs to follow to break its curse. Mr Regan said as much that QBE needs to get smaller before it can get bigger again. I hope he takes his time to execute the second part of his strategy.

QBE’s problem isn’t growth. It’s about getting the ship to float properly.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. 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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