Top broker nominates the best insurance stock to own ahead of results

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.

Looking for other buying opportunities during the current market sell-down? The experts at the Motley Fool have uncovered three stocks that are well placed to outperform in 2018, if not beyond.

Click on the link below to find out for free what these stocks are and why they should be on your watchlist.

The Disruptors: 3 Revolutionary Aussie Companies to Back for 2018

We’re living in one of the most exciting times in investing history. Innovation and a booming culture of entrepreneurship are constantly creating new companies with the potential to make forward-thinking investors very rich. Now more than ever, one small, smart investment could make a huge difference to your wealth.

That’s why at The Motley Fool we’ve been scrutinizing the ASX to uncover the kinds of companies that we believe could turn into the next Cochlear or REA Group.

We’ve found three exciting companies that we believe re poised to perform in the new year. Click here to uncover these ideas!

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Insurance Australia Group Limited. The Motley Fool Australia has recommended NIB Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.