Key Points
- Macquarie have upgraded QBE to 'outperform' from 'neutral' in a recent note
- The broker likes QBE's valuation and reckons it can see margin expansion in FY22
- Analysts estimate the insurer's operating ratio to come in at 92%
- QBE closed the week less than 1% up at $12.06 but was in the red today.
Shares in insurance giant QBE Insurance Group Ltd (ASX: QBE) inched lower today to finish less than 1% in the red at $12.05.
The insurance industry has been catching headlines these past few months amid a flurry of serious weather events and the ongoing impacts of COVID-19 lockdowns.
As such, price dispersion has been wide reaching for the QBE share price these past 3 months, with shares trading as high as $12.41 and as low as $11.29 in that time.
Near term, shares have climbed 6% since January, and analysts at Macquarie have subsequently upgraded their rating on the QBE share price to 'outperform' in a note to clients yesterday. Let's take a look.
Why is QBE tipped to outperform?
Macquarie reckons that QBE is positioned to benefit from a healthy collection of tailwinds in the global insurance pricing cycle and rising bond yields.
Whilst the broker acknowledges that QBE won't be immune to challenges in the reinsurance market – which it states is tightening and offering less return – the above macroeconomic factors should help decompress margins for the insurer into FY22, it says.
It upgraded the insurance giant to a 'buy', citing reasons of valuation in the weighting of its decision. For instance, the bank noted at the time that QBE was trading at a 12% weighted discount to its international peer group, below its 3-year normalised value of 8%.
Not only that, with recent strengths on the chart and 'portfolio remediation' measures in place, Macquarie reckons that disconnect could reduce, leading the QBE share price to outperform its peers in 2022.
"As underperforming portfolios continue to be remediated", Macquarie says, in reference to the above, "QBE's long-term discount versus peers should reduce, in our view".
The broker upgraded its rating and raised the valuation by 11% to $13.90 per share in its note to clients.
Macquarie joins fellow broker Morgans who reckons that QBE is a buy right now as well. It says that QBE could carry positive underlying momentum this year, and expects the insurer to pay a 64.8 cents per share dividend in FY22.
Not only that, Morgans notes the company has been "putting through top-line rate increases of around 9%" which should, like Macquarie said, assist margin expansion this year.
The broker also points out QBE's "relatively inexpensive valuation" of approximately 12.8x estimated FY22 P/E at the time of the release – 12.41x at the close on Friday.
It too sees potential upside in QBE and values the company at $13.70, representing a 14% margin of safety at the time of writing.
QBE share price snapshot
In the last 12 months, the QBE share price has climbed more than 38% after rallying 4% in the last month. This year to date it has fared well too and is 6% in the green.
Each of these returns has outpaced the benchmark S&P/ASX 200 Index (ASX: XJO)'s return in that last year.
