About: QBE Insurance Group Limited is an insurance company which underwrites most forms of commercial and industrial insurance policies, as well as individual policies. QBE also manages Lloyds syndicates and provides investment management services. The Company provides its services both domestically and internationally.

Why it is in the portfolio: In a low yield environment where everything seems a little expensive, a robust yield and reasonable prospects of growth are valuable attributes. As an insurance company with a global presence QBE is also a good diversifier for Australian investors. Lastly, QBE has struggled to deliver earnings growth and is a little out of favour with the upside that brings if its operational performance improves, which would be emphasised with the hoped for improvement in the highly cyclical insurance market and the investing environment (insurers depend to a large degree on bond markets to reinvest premiums so they tend to outperform when rates rise).

Fundamentals: QBE yields almost 6% on a trailing basis although dividends may decrease slightly if the underwriting environment doesn't improve (as a globally focused insurer QBE was hit by the worst hurricane season on record, at least from an insurers' perspective). These conditions also tend to improve insurance pricing in the medium term and QBE is by the most leveraged to the global insurance pricing cycle which makes it a very good diversifier. Lastly, this random variability in earnings, which a diversified investor should be able to cope with well, has left QBE cheaper than rivals such as IAG and could even be a takeover target at these levels.

What could go wrong: Aside from further specific and unexpected underwriting losses QBE’s main risk is perhaps the flipside of the diversification that it offers - many commentators feel that it is too thinly spread as an Australian based insurer competing in global markets, notably the highly competitive US. As mentioned above heavy underwriting losses, for instance from a natural disaster, also tend to lead to hardening in pricing power for insurers. While company specific losses are fairly rare they are also impossible to predict, which is why we hold several insurance companies.