Why Goldman Sachs put an $11.35 share price target on QBE Insurance Group Ltd

Is Insurance Australia Group Ltd (ASX:IAG) a better bet than QBE Insurance Group Ltd (ASX:QBE)?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors in QBE Insurance Group Ltd (ASX: QBE) have had a tough time over the past 5 years with the shares down around 29% despite the group supposedly being exposed to the benefits of rising cash rates in the United States.

In theory QBE should be a big winner from rising cash and benchmark interest rates in the US as it invests the majority of the premiums it receives in order to generate additional returns. Therefore regular rises in cash rates as we have seen in the US for example should help its overall profitability.

Last week Goldman Sachs analysts noted how QBE suggested its guidance for 2018 investment returns between 2.25% – 2.75% is now likely to come in at the lower end of this range, as the anticipated uplift from the macro environment didn't tale as strong effect as hoped for.

Another core driver of profitability for QBE is the difference between premiums earned less claims and expenses paid. This week QBE confirmed it is on track to achieve a combined operating ratio (COR) of 95%-97%, which would indicate a profitable year for the business.

The lower the COR for an insurer the more profitable it is, as it basically means combined premiums earned are greater than claims and expenses. This result is a positive for QBE that has a mixed track record over many years that has hurt its reputation as an investment prospect.

Goldmans' analysts also noted how even though QBE's "pricing and premium retention remains solid, we await further evidence of the degree to which this is translating into premium growth at the FY18 result ".

In a November 12 presentation to the ASX, QBE itself confirmed it is continuing to work on simplifying the business after it became apparent its complexity was causing it problems overseas in particular after a rapid expansion strategy. It will also update analysts on December 11 as to the progress of its cost-cutting programs and reinsurance placement program.

Goldman Sachs stated that they are "neutral" on the stock with a $11.35 share price target. QBE's shares today are selling for $11.39, which suggests they are around fair value according to Goldmans.

According to Goldmans risks to the upside include "a major turn in the global commercial insurance rate cycle", while risks to the downside include "a more prolonged soft pricing backdrop than expected".

Two insurers worth looking at that pay bigger dividends than QBE and have better track records are Insurance Australia Group Ltd (ASX: IAG) and Suncorp Group Ltd (ASX: SUN).

Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

More on Share Market News

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Share Gainers

These were the best-performing ASX 200 shares in March

These shares made their shareholders smile in March thanks to some very big gains.

Read more »

Businessman using a digital tablet with a graphical chart, symbolising the stock market.
Opinions

2 ASX shares I have been buying in 2024!

I’m a believer in the long-term outlook of these stocks.

Read more »

Stock market chart in green with a rising arrow symbolising a rising share price.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a massive day for the ASX 200, with a new all-time high recorded.

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Technology Shares

This ASX tech stock rocketed 60% in March! Can it keep on delivering?

After soaring in March, the ASX tech stock is now up 169% since this time last year.

Read more »

Broker Notes

Brokers name 3 ASX shares to buy now

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A young man clasps his hand to his head with his eyes closed and a pained expression on his face as he clasps a laptop computer in front of him, seemingly learning of bad news or a poor investment.
Share Fallers

Why Burgundy Diamond Mines, Clarity Pharmaceuticals, EML, and Zip are sinking today

These ASX shares are ending the week in the red. But why?

Read more »

A young women pumps her fists in excitement after seeing some good news on her laptop.
Share Gainers

Why Mesoblast, Newmont, Pilbara Minerals, and Platinum shares are jumping

These ASX shares are ending the week strongly. But why?

Read more »

a young boy dressed up in a business suit and tie has a cute grin and holds two fingers up.
Opinions

2 of my top ASX 200 shares to consider buying before April

I would happily exchange dollars for these two shares right now.

Read more »