Investors in QBE Insurance Group Ltd (ASX: QBE) have had a tough time over the past 5 years with the shares down around 29% despite the group supposedly being exposed to the benefits of rising cash rates in the United States.
In theory QBE should be a big winner from rising cash and benchmark interest rates in the US as it invests the majority of the premiums it receives in order to generate additional returns. Therefore regular rises in cash rates as we have seen in the US for example should help its overall profitability.
Last week Goldman Sachs analysts noted how QBE suggested its guidance for 2018 investment returns between 2.25% – 2.75% is now likely to come in at the lower end of this range, as the anticipated uplift from the macro environment didn't tale as strong effect as hoped for.
Another core driver of profitability for QBE is the difference between premiums earned less claims and expenses paid. This week QBE confirmed it is on track to achieve a combined operating ratio (COR) of 95%-97%, which would indicate a profitable year for the business.
The lower the COR for an insurer the more profitable it is, as it basically means combined premiums earned are greater than claims and expenses. This result is a positive for QBE that has a mixed track record over many years that has hurt its reputation as an investment prospect.
Goldmans' analysts also noted how even though QBE's "pricing and premium retention remains solid, we await further evidence of the degree to which this is translating into premium growth at the FY18 result ".
In a November 12 presentation to the ASX, QBE itself confirmed it is continuing to work on simplifying the business after it became apparent its complexity was causing it problems overseas in particular after a rapid expansion strategy. It will also update analysts on December 11 as to the progress of its cost-cutting programs and reinsurance placement program.
Goldman Sachs stated that they are "neutral" on the stock with a $11.35 share price target. QBE's shares today are selling for $11.39, which suggests they are around fair value according to Goldmans.
According to Goldmans risks to the upside include "a major turn in the global commercial insurance rate cycle", while risks to the downside include "a more prolonged soft pricing backdrop than expected".
Two insurers worth looking at that pay bigger dividends than QBE and have better track records are Insurance Australia Group Ltd (ASX: IAG) and Suncorp Group Ltd (ASX: SUN).
