Why the QBE (ASX:QBE) share price has been given a conviction buy rating

The QBE Insurance Group Ltd (ASX:QBE) share price has been tipped as a strong buy by a leading broker…

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The QBE Insurance Group Ltd (ASX: QBE) share price was a very poor performer on Friday.

The insurance giant’s shares crashed 12.5% lower on the day to end the week at $8.71.

Why did the QBE share price crash lower?

Investors were selling QBE’s shares on Friday after it released an update on its expectations for FY 2020.

That update revealed that the insurer expects to report an adjusted net cash loss after tax of approximately $780 million. This was driven by a combination of COVID-19 costs, elevated catastrophe costs, an increase in prior accident year claims development, and a non-cash write-down in its North American business.

Is this a buying opportunity?

One leading broker believes that investors should be taking advantage of the weakness in the QBE share price to invest.

According to a note out of Goldman Sachs, its analysts have maintained their conviction buy rating and trimmed their price target on the insurance giant’s shares to $10.67.

While it was disappointed with the above, it was encouraged by a number of things. This includes premium rate acceleration, further attritional loss ratio improvement in the second half, consistent COVID cost estimates, and its capital remaining at the upper end of the 1.6x to 1.8x PCA ratio range in FY 2020.

Goldman believes “these elements alongside progress on efficiency (program tracking to plan) continue to point to a solid growth/margin trajectory into FY21/FY22.”

It also sees a lot of a value in the company’s shares at the current level.

The broker explained: “While a disappointing end to a particularly troubled FY20, at 12x our FY21 earnings we continue to think QBE looks attractive relative to growth we forecast and remain broadly comfortable with our thesis given a mix of 1) the hardening global market, 2) more meaningful evidence of operating leverage in FY21+ 3) bottoming investment earnings and 4) solid balance sheet. Maintain our Buy rating (on CL).”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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