QBE Insurance Group Ltd (ASX:QBE) is casting a shadow over the insurance sector with the stock crashing 9.5% in late afternoon trade to $11.98 following a shock profit warning by management. But there's one insurance stock that could be on the cusp of a profit upgrade, according to at least one broker.
But investor confidence in our insurers has taken a body blow after QBE said it received a higher than expected number of insurance claims in its Asian and Latin American businesses.
Its peers Suncorp Group Ltd (ASX: SUN) and Insurance Australia Group Ltd (ASX: IAG) have fallen in sympathy with both stocks shedding around 2% of their value each when the S&P/ASX 200 (Index:^AXJO)(ASX:XJO) is down 1.5%.
However, this could represent a good opportunity to buy shares in IAG as the insurer may have just entered a profit upgrade cycle, said Morgan Stanley in its latest report on the company.
The key attraction of IAG is that it offers the best exposure to Australian small and medium sized businesses (SMEs) and the outlook for this segment is positive. In fact, IAG's relatively large exposure to SMEs is one reason why the broker thinks group margins have space to expand to 17% by FY20 compared with the forecast 12.8% in the current financial year.
IAG is estimated to have a 25% market share of the SME sector, which is twice that of Suncorp and 13 times that of QBE.
Besides scope for the insurer to grow profits from bigger margins and increases in premiums, the stock will also appeal to income seeking investors as IAG is expected to generate a dividend yield of around 6.3% once franking is included.
This isn't to say you should dump QBE and buy IAG. History has shown that it is more often than not a good opportunity to buy an insurer on the back of negative claims announcements as larger-than-expected claims are typically one-off events.
From that perspective, it is probably a good idea to take a portfolio approach to the sector. Don't just own one insurance stock but a small handful of quality players with a track record of delivering results.
However, IAG isn't the only stock with growth and yield appeal. The experts at The Motley Fool have found a stock that is worth keeping a close eye on. Click below to see what this stock is (hint: it isn't in the insurance or broader finance sector).
