buffett's views on insurance, page-2

You are right to focus on RELATIVE performance. Whilst it is no comfort to recent shareholders, the fact is that all insurance companies are competing with each other on premium rates.
If QBE was at the bottom of the pack in relative performance then one could argue that they are just poorly managed and that the recent poor results was company specific. In such a scenario you would question the wisdom of holding such a company.

BUT QBE is not at the bottom of the pack , it is in fact one of the worlds leaders in underwriting as Relax points out.
As such If QBE is struggling then the rest of the industry is struggling.
Struggling industries it is true CAN be a sign that the industry is becoming obsolete for example railway companies in the US or recently Kodaks demise. But like Banking, insurance will never become obsolete they are core industries in modern society. People need insurance.

Furthermore insurance companies can set their own price. Normally premium increases in isolation would trigger a loss of market share and so insurance companies are loath to do so beyond because of this. But when a company of the stature of QBE is struggling, the assumption is that the whole industry is feeling the same pressures and in this case the assumption is correct. That is why we will see substantial premium increases across the industry, as the individual companies try to re establish profitability.

Surging premiums are one component to a return to normal profit.
In the case of QBE we have 3 other components

1 A reversion back to the mean for disaster events. This has been well covered by the headline driven media. The number of disasters world wide has been unbelievable the past 12 months. Whilst anything can and does happen, the rational expectation should be that the past 12 months has been the exception rather than the norm.

2 Currency translation. QBE's expansion has been mainly international over the past decade, and so the influence on AUD earnings of international earnings has gone from being marginal to a major driver of profits. Unfortunately this has been a major brake on earnings over the past 2 years.

3 Massive fall in "risk free" returns. Due to their conservative policy on how to invest the premiums , QBE's returns have fallen dramatically especially with the fall in US treasuries. Whilst we should be thankful that they have not been more adventurous and for example invested in Greek bonds, the downside is another major drag on performance.

Starting with the premium increases which have a substantial effect on the bottom line, QBE will rebound its profits. A return to normal disaster events should be expected.
Arguably the AUD and US treasuries cannot move materially against QBE much further, and so the downside is capped and the upside is massive.

I continue to accumulate QBE and will LOVE those dividends which with a little luck will be at 15 % based on current prices within a few years.