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Who is winning in insurance?

Broker reports editor |  19 December 2013  |  Investing

win-insuranceThe 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.
Increasing price target to $6.60, maintain Buy rating


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."

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:








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