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Citi: Only one insurance stock worth buying amid the Royal Commission chaos

It’s hard to build a case to buy insurance stocks when the Royal Commission is uncovering dodgy practices that will haunt the industry for a long time and I am expecting further underperformance from the sector.

As it stands, the share prices of our major general insurers such as Insurance Australia Group Ltd (ASX: IAG) and Suncorp Group Ltd (ASX: SUN) are down close to 1% in afternoon trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up 0.6%.

The losses arn’t as bad as smaller insurer Clearview Wealth Ltd (ASX: CVW) with its 5% crash as its chief executive admitted to the Royal Commission that the company breached the law 300,000 times.

There is one in the sector that is bucking the trend though. It’s QBE Insurance Group Ltd (ASX: QBE) with the stock trading at break-even at the time of writing, and this is the only general insurer that Citigroup thinks is worth buying even though the broker thinks general insurers are the most attractive part of the sector at the moment.

I couldn’t agree more. QBE is the only insurance stock I like and I think it will be least impacted by the Royal Commission thanks to its highly diversified business that spans several countries.

The irony is that QBE is regarded as a dog due to its long history of disappointing shareholders. But last month’s results showed that every dog has its day.

“We believe QBE’s 1H18 result is its first step on the road to redemption. We saw enough evidence in it to suggest the stock can move further along this road although, in our view, the next leg of share price performance may be harder than the gains from a result that, for once, failed to disappoint,” said Citigroup.

“We believe the stock currently offers the best value in the sector and, while the risk profile is elevated, we remain optimistic of further progress with potential for meaningful medium-term upside if our forecasts are delivered.”

I also believe that QBE is best leveraged to rising US government bond yields and the rising US dollar than its peers as it has a significant exposure to that market.

The rising US Treasury yields may be the thing that keeps QBE’s share price on the uptrend. Experts have noted that it takes a year or two before insurers like QBE start to see the benefit from higher yields on their bottom line.

We can only hope that management doesn’t do anything to damage the investor goodwill the company is starting to receive.

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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. 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 Scott Phillips.

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