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Morningstar backs QBE Insurance

Investment house Morningstar has come out backing QBE Insurance (ASX: QBE). Mr Peter Warnes, Head of Equities Research at Morningstar, noted in a recent interview that despite disappointments there were some positives in QBE’s interim result.

Specifically, Mr Warnes highlighted the benefits from adjustments to the discount rate thanks to favourable moves in bond yields. For the six months to June the discount rate benefit only just covered the increased US$178 million of claims from prior year losses which “popped up.” However looking forward, with bond yields continuing to improve Warnes, is focussing on the positive yield environment QBE is entering.

Warnes also made the point that QBE experiences many of its costs in the first half with earnings skewed to a seasonally stronger second half. With the USA crop harvest looking healthy, earnings from the North American crop insurance business have the potential to be much better this year than last.

Foolish takeaway

QBE reported a fall in net profit of 37%, making it clearly the least impressive result from the major insurers. Suncorp (ASX: SUN) managed to increase its underlying profits by 19%, while Insurance Australia Group (ASX: IAG) reported a significant boost to both earnings and dividends for shareholders.

With QBE’s earnings coming off a low base and with a share price which has underperformed its peers by around 20% over the past year there could still be further upside for QBE, however the complexity of its accounts make an investment in QBE a higher risk option.

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Motley Fool contributor Tim McArthur owns shares in QBE Insurance.

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