Deutsche Bank has upgraded QBE to buy and despite potential for some short-term volatility, the insurer's recent earnings represent a turning point for the stock.

Deutsche Bank has moved to upgrade QBE Insurance Group to buy from hold, with a target price of $14.00 as it sees considerable medium-term value in the stock.

The broker notes that while QBE's insurance profits were in line with its downgraded guidance, its full-year result will nevertheless prove to be a turning point for the insurer.

"The move to more decisively reduce balance sheet risks through reducing gearing and raising reserves will place QBE on more solid footing while rebased insurance trading result margin guidance should lift considerably as cost reductions and premium rate rises flow through with longer-term upside risk from higher yields,” Deutsche Bank said in a note.

The bank now believes the earnings risks are skewed to the upside, particularly on a three-year view as insurance trading result margins have been rebased to an achievable 11 per cent level. Although Deutsche believes upside risks are low on a one year view, it believes margins should lift to greater than 13 per cent by fiscal 2015 with upside risks driven by: an improving pricing backdrop, which will support a 5 per cent rate rise in fiscal 2013; rising leverage in US/European interest rates; and potential for upside in $250 million cost reductions through supply chain initiatives.

While Deutsche notes its buy call might be a bit early given the unlikely event of short-term upside surprises, the insurers stronger multi-year earnings outlook points to attractive medium-term upside with its PE at a discount compared to the domestic general insurers widening from around 2 per cent in fiscal 2013 to 20 per cent over three years.

Combined with a dividend yield of 5 per cent, Deutsche sees total shareholder return of around 15 per cent over a three year period.

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