FY18 is shaping up as the Year of the Insurers with several brokers releasing positive sector round-ups this week after a round of mark-to-market revisions.
Insurance companies sailed through the June quarter, buoyed by a solid run in equities and fairly steady bond markets, allowing them to regain ground lost in the March quarter when the share market faltered and credit spreads widened 10-20 basis points.
Brokers expect the benign environment to continue, citing strong fundamentals for equity markets and contained inflation (forecasts range from 3% to 3.5%), which should keep a lid on interest rates.
Add to that a broadly based focus on pricing and claim containment, and brokers are largely confident, while noting net outflows will continue to dog specific stocks.
On the downside, given the share price recovery, only a few offer a true value proposition: AMP ((AMP)) being one, given its recent market flogging (but it is still vulnerable to net outflows).
General Insurance appears to be the golden child, brokers citing good weather and margins (thanks to pricing and claim controls), although credit spreads may continue to take a small toll.
Morgan Stanley’s New Premium Index shows new business for General Insurers in the June quarter of 2018 rose 1% for home and 2% for motor, and the broker is expecting a good FY18 reporting season.
The rise was driven by broad-based premium increases and the broker expects this should improve industry’s poor retention rates.
Higher claim severity in the motor-vehicle market was also being countered by a tightening hire-car availability and supply chain leakage. The broker expects this to translate to higher margins over FY19.
Morgan Stanley expects home margins to be stable given contained inflation.
UBS also favours the General Insurers on the basis of benign weather and inflation, and has raised the target prices and earnings per share estimates for Insurance Australia Group ((IAG)), up 7.3%, and Suncorp ((SUN)), up 6.1% – its sector picks.
UBS singles out QBE Insurance ((QBE)) for comment, noting that higher risk-free rates in the US and wider credit spreads are likely to drive a -$140 million loss, which will be partially offset by reserve discount rate gains, resulting in a net -4.5% earnings hit in FY18. The broker has cut earnings per share forecasts -6% to reflect currency assumptions
UBS expects outflows from AMP, Perpetual ((PPT)), Medibank Private ((MPL)), Janus Henderson Group ((JHG)) and Pendal Group ((PDL)); but solid net inflows from IOOF Holdings ((IFL)) and Netwealth ((NWL)).
Credit Suisse also prefers domestic General Insurers, citing the positive turn in the rate cycle. It lifts the target prices Suncorp and IAG, preferring the former.
Its sector stock ranking from top to bottom is: AMP (which has earned an Outperform rating thanks to its share price fall), Tower ((TWR)), AUB Group ((AUB)), Steadfast ((SDF)), IAG , Suncorp, Medibank Private, QBE and nib Holdings ((NHF)).