Who is winning in insurance?
Broker reports editor |
19 December 2013
The disastrous share price fall of QBE, after its announcement of an 18% fall in cash profit, led to $6 billion being wiped from its market worth. There are further concerns: in the final footnote to QBE's annual accounts, ''guarantees and contingent liabilities'', are a $US1.36 billion ($1.51 billion) letter of credit and a $US1.94 billion letter of credit.
Bell Potter has a buy recommendation on IAG and a price target of $6.60 after the company announced the purchase of Wesfarmer's Australasian underwriting businesses for $1.845bn. The purchase will be funded by a combination of ordinary equity, subordinated debt and internal funds. The capital raising includes a fully underwritten $1.2bn institutional placement and a non-underwritten $200m (capped) SPP at $5.47 per share. Potter estimates pre-tax net synergiesat $140m with the bulk to be realised within two years. They point out insurance is a scale game:
"It may be relatively easy to grow market share up to 5% but getting from 5% to 10% appears to be a different story and a much harder proposition. In our view, the sale of WES’s underwriting business (market share <10%) reminds us that insurance is a scale game that would be best left to the larger players.
Our estimates are revised for changes in GWP and expense assumptions within the Australian Intermediated (CGU) and New Zealand businesses, leading to a conservative 3-4% increase in cash EPS from 2015. IAG has also reaffirmed its 2014 guidance of 5-7% GWP growth and 12.5-14.5% reported insurance margin excluding this transaction. Our price target has increased to $6.60 (previously $6.50) largely as a result of available synergies and the Buy rating is maintained for this quality insurer."
Increasing price target to $6.60, maintain Buy rating
Here are Bell Potter's fundamentals. The dividend yield is over 5%:
For DIY investors, it is worth looking at the whole insurance sector. UBS has done this:
"The dominant trends in 3Q appear well entrenched and likely to persist for some time. In-force growth for the three major incumbents that control close to 50% of the retail market (AMP, CBA, NAB), has now slumped to low single digits, as re- pricing initiatives are balanced against the risk of further aggravating high lapses. Meanwhile, smaller players that are unencumbered by legacy issues are taking advantage and growing well ahead of system.
? Leading indicators for growth remain subdued After significant 2Q growth fuelled by Group re-pricing, 3Q new business sales reduced by 2% on pcp, to $746m. Within this, Individual sales of $531m were flat on 3Q12, and 12-month rolling growth contracted to 5% from 9% last quarter. Despite slowing sales momentum, Individual in-force growth held up at 9.3% (vs 9.0% in 2Q), a solid outcome given persistent lapse pressures.
? AMP hanging in there with $120m of Individual new business It was a characteristically strong 3Q for AMP given annual price increases, although sales of $120m were only 3.3% above pcp. On a 12-month rolling basis, Individual new business is only running 1.2% up. Combined with elevated lapse rates, this suggests the current in-force premium growth rate of 4.8% could slow further. Our current earnings forecasts assume 5% FY14E growth for AMP."
Here is a breakdown of the market shares of the Australian players: