Expert opinion is divided over the QBE Insurance Group Ltd (ASX: QBE) share price. Some believe the insurer is at the cusp of an upgrade cycle while others have cut their recommendation on the stock.
The bears are winning today with the QBE share price falling 1.2% to $12.71 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is losing 0.4% of its value.
Despite the weakness, QBE is still the best performing large cap general insurer over the past year with a gain of just over 10% while the Insurance Australia Group Ltd (ASX: IAG) share price is up 8% and the Suncorp Group Ltd (ASX: SUN) share price is 7% in the red.
Bears mauling QBE
It's not an easy time being an insurer with the number bushfires devastating parts of the country and adverse weather leading to crop failures. IAG is seen as the most exposed to the bushfires and QBE will feel the impact of the drought due to its crop insurance products.
This is one reason why Citigroup downgraded QBE to "hold" from "buy" even as it stuck to its price target of $13.45 a share.
"We now think it highly likely crop insurance COR [combined operating ratio] will be >100% in FY19 and have factored 102% into our forecasts, but the impact should be confined to this year," said Citi.
"Cognisant of other likely headwinds to 2H COR, including CATs and higher crop NEP [net earned premium] in 2H, we also increase our forecast 2H underlying claims ratio."
QBE entering an upgrade cycle
But not everyone sees dark clouds on the horizon. Morgan Stanley thinks QBE is standing at the "dawn of an upgrade cycle" and upgraded its price target to $14 from $13 a share.
The broker thinks investors should be taking a fresh look at the business given that QBE now has a simpler de-risked portfolio.
Further the insurer has a program to address underperforming portfolios, strengthening fundamentals and a strong balance sheet.
Earnings tailwinds
"Strong execution and constructive fundamentals support COR momentum. The upgrade cycle is not in the price," said Morgan Stanley, which rates the stock as "overweight".
"The extensive remediation of QBE's portfolio since 2012 was an arduous process, contributing to a series of downgrades.
"Meanwhile, peers were participating in growth. Now, while many peers (TRV, AIG, Zurich, Lloyd's of London) are facing reserving uncertainty and poor attritional performance, QBE finds itself with a relatively cleaner portfolio… [and] has the potential to outperform."
Some of the drivers behind Morgan Stanley's bullish call include tailwinds for its London and US commercial businesses, continuing growth momentum in Australia and New Zealand and structurally lower yields.
