Citigroup is tipping Suncorp Group Ltd (ASX: SUN) as the best insurance stock to own as the profit reporting season heats up amid the sharp market sell-off.
The share price of Suncorp isn't immune from the ruckus that has triggered a 1.7% plunge in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO), although it is interesting that the insurer is only down a more modest 0.6% to $13.72.
This could be a good buying opportunity if Citigroup is to be believed. The broker notes the pick-up in general insurance rates even though the increase is slower than what some have been hoping.
The upswing in insurance rates will be a tailwind for the whole industry, which also includes Insurance Australia Group Ltd (ASX: IAG), AMP Limited (ASX: AMP) and QBE Insurance Group Ltd (ASX: QBE).
However, Suncorp is a standout due to its modest valuation although the broker is expecting the company to deliver a "messy" first half result that will be scarred by high payouts from natural disasters, additional upfront costs from its business improvement initiatives and falling profitability from its Queensland compulsory third party (CTP) insurance business.
Suncorp is the only stock in this sector that has a "buy" rating from Citigroup with a price target of $15 a share.
The broker likes IAG too but as it regards IAG as a "higher quality" buy with a more stable earnings stream and the potential for a capital return when it delivers its full year results in August.
But a lot of the good news seems to be factored in to the share price with the stock trading at around a 20 times price-earnings (P/E) multiple to Citigroup's FY20 estimates.
On the other hand, the poor track records of AMP and QBE doesn't inspire confidence. Citigroup can't see any catalyst that will unlock value in AMP while it thinks it's too early to be buying QBE following its recent profit warning.
There are also limited opportunities among listed health insurers Medibank Private Ltd (ASX: MPL) and NIB Holdings Limited (ASX: NHF).
Opposition leader Bill Shorten's war on the sector by promising to cap annual rate increases to 2% or less poses a threat to these insurers who are already trading on pretty full multiples.
It might be a while yet before Mr Shorten gets a real shot at becoming Prime Minister and his threat could be an overhang on the sector.
Further, Citigroup doesn't think Medibank will be able to deliver growth in underlying earnings per share until FY19 and warns that NIB is overpriced.
The broker has a "hold" on Medibank and a "sell" on NIB.
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