Goldman Sachs has been busy running the rule over the insurance industry and named QBE Insurance Group Ltd (ASX: QBE) shares as its top pick.
This morning, the broker has initiated coverage on the company with a buy rating and $16.67 price target.
Based on its current share price of $13.60, this implies potential upside of over 22% for QBE shares over the next 12 months.
Goldman is also expecting a 5.3% dividend yield in FY 2023, boosting the total potential return beyond 27%.
Seven reasons to buy QBE shares
The broker has named seven reasons why it thinks investors should buy QBE shares right now.
The first couple of reasons relate to favourable industry tailwinds, which are expected to boost its near term performance. It explained:
We like QBE because: 1) It is most exposed to the strength in the commercial premium rate cycle which we think will continue, particularly in classes exposed to higher reinsurance costs and underlying claims inflation such as commercial property / motor. Comments from QBE have been clear that they are pricing ahead of loss cost inflation; 2) QBE is seeing organic volume growth on a constant currency basis ex-crop and price increases. We think the strong rate environment coupled with underlying volume growth provides flexibility for QBE to manage any trade-off between top line net earned premium (NEP) growth and margins. 3QYTD constant currency GWP growth was 16% v guidance of 10% constant currency for FY22 – which we think looks conservative.
Goldman also likes the company's reserve strength and sees opportunities for further margin expansion thanks to stronger yields and changes in the property business. The broker commented:
3) We note that QBE continues to build reserve strength by assuming an extended inflationary environment across reserving / pricing; 4) Yields are supporting margins and could see further upside into FY23. QBE is most sensitive to a lift in global interest rates including the US; 5) We see continued opportunity for margin expansion through remediation of QBE's property business in North America and increasing mix to Crop. Our FY23 underlying insurance margins are close to 12%, and above Visible Alpha consensus of 11.5%. This is about a 1% improvement from FY22E at 10.9% underlying on 94% COR.
Finally, the broker believes QBE shares are trading at an attractive level compared to historical levels, particularly given its strong capital position. It concludes:
6) Valuation not demanding at ~9x FY23E BBG consensus v recent historical trading range around ~12-15x. We think an ongoing build of reserve strength and catastrophe allowances through a strong premium rate environment should help QBE improve the predictability and consistency of its results supporting a valuation re-rate. 7) Strong capital position expected at FY22 – at the upper end of target range.
