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 MARKET REPORTS |
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Analyst report - shares
The right insurance for investment
September 10, 2007
Brendon Lau, ShareAnalysis
A number of companies in the insurance sub-sector have delivered solid results in the last month. However, it would be a mistake to think that all stocks in this space are fundamentally the same, as the business model of each insurance company can vary significantly.
Insurance stocks can be generally split into two categories: General Insurance and Life. QBE Insurance (QBE), Suncorp-Metway (SUN) and Insurance Australia Group (IAG) belong to the first category. QBE’s interim result was the standout, as its 1H07 result soundly beat our forecast by over 10%. The main drivers of growth were low claims payouts, higher investment yields and recent US acquisitions. However, the stronger Australian dollar adversely impacted profits.
Meanwhile, SUN delivered a credible full year result, its first since recently acquiring Promina. The integration of Promina appears to have started on the right foot, and its insurance division has produced a strong result, despite the impact of the NSW storms. SUN is unique from other insurers in this category, as it has a banking and wealth management business.
IAG’s result was the most disappointing. Although premium revenue grew by 15% due to the UK acquisitions and renewed growth in Australian Personal Lines, NPAT was severely impacted by the $200M cost of the NSW and UK storms. The newly acquired UK businesses did not perform as well as expected. IAG and SUN also benefited from prior year provision releases in long tail classes (for example, CTP and Workers Compensation), which have continued to benefit from tort reforms.
Owing to the mature nature of the domestic general insurance market, these insurers will probably have to rely on acquisitions to drive growth. From this perspective, QBE has the upper hand, as it is more experienced in successfully integrating substantial acquisitions on the world stage.
Life insurers include TOWER Australia (TAL), AMP Limited (AMP) and AXA Asia Pacific (AXA). TAL provides term life, disability, income protection and critical illness/trauma insurance products for the retail and corporate markets. TAL has a niche investment business, comprising superannuation, non-superannuation and annuity products. Its investment business makes up a relatively small part of its business compared to that of AMP and AXA, where there are better prospects for growth. TAL will release its FY07 result later in the year.
AMP’s strong underlying performance reflected strong net cash flows, strong growth in assets under management, tight cost control and an unusually large profit from the general insurance run-off book (Cobalt/Gordian).
AXA’s 1H07 NPAT result was about 16% above Aegis Equities' forecast. The result was driven by strong funds inflows in Australia, buoyant equity markets, strong claims experience in financial protection and good expense control. Hong Kong experienced strong earnings growth, benefiting from recent acquisitions and strong sales growth.
More articles from this week's CompareShares newsletter:
Stocks: Uranium heavyweights come back fighting
CFDs: Hedging your losses, and making profits, using CFDs
Fundamental analysis: What is the price/earnings ratio of the overall market?
Smart investing: Home sweet debt
Resident Trader: Trading against computer-generated stops
Stock of the week: ABC Learning
Analyst report: The right insurance for investment
CFDs: Slippage - the sworn enemy of CFD traders
Options: Trading options close to expiry
Brendon Lau is the Editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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