The only way is up after horror year for insurers
Australia’s listed insurers will be glad to see the back of the 2007/08 financial year.
It was truly an annus horribilis for finance sector stocks, which plunged 34.92% on the Standard & Poor’s/ASX 200.
QBE was the only insurer to better the overall market slide but still endured a 28% fall to finish the year on $22.40.
Suncorp ended last Tuesday at $13.04, down 35%, while IAG fared even worse, shedding 39% to end at $3.47.
QBE was ranked at 92 in the S&P/ASX 200, with Suncorp coming in at 116 and IAG bringing up the rear at 125.
The finance sector bore the brunt of the global credit meltdown, with the overall S&P/ASX 200 down a less drastic 16.9%.
The pain is likely to continue for listed Australian companies in the upcoming 2007/08 results season, with overall market earnings per share growth tipped to be as low as 1%.
And insurers are likely to suffer more than most, with UBS’ David Cassidy reported as predicting a 20% fall in insurance earnings.
Credit Suisse analyst Arjan van Veen agrees insurers are likely to suffer in the short term, primarily due to weather-related claims. “Earnings will be low mainly because of the storms but will bounce back in 09,” he told insuranceNEWS.com.au.
So how do insurers shore up their results in 2008/09 and, more importantly, demonstrate the improvement to their increasingly sceptical institutional and retail shareholders?
IAG faces the sternest test of the big three.
A Credit Suisse report issued last week highlights a host of challenges for new IAG CEO Mike Wilkins, most notably the adequacy of reserves, the mix of business (short-tail/long-tail, personal/commercial), dealing with large claims (reinsurance protection), investment return volatility and exposure to third parties.
Credit Suisse says Mr Wilkins needs to give the market some guidance “as to the cost savings likely to be achieved from the division restructure” he announced in April.
It says he also needs to issue a detailed trading update on the June commercial renewals season, clarify the impact of personal lines rate increases which have seen IAG lift motor premiums by 5% and update the market on NZ, where IAG has flagged 15-20% rate hikes in home insurance and $16 million savings from improved productivity measures.
Many analysts think Mr Wilkins will be forced to bite the bullet and cut IAG’s final dividend from 16c a share. But Credit Suisse doesn’t agree, saying the IAG board would come under intense pressure from disgruntled shareholders if they cut dividends in the wake of their rejection of QBE’s $8.7 billion takeover proposal.
“A cut in the dividend would seriously put in doubt the rationale for rejecting the IAG bid, and as such would have serious repercussions for the IAG board,” the report states.
Instead, Credit Suisse believes IAG is likely to underwrite an unchanged dividend – as are Suncorp and the majority of financial institutions – using a combination of franking credits and convertible preference shares.
The weakening investment markets have also taken a toll on IAG and Suncorp’s bonds, which have mark-to-market issues that will weaken their capital base. “They will have to mark their bond portfolios down,” Mr van Veen said.
All three insurers will feel the benefits of the upturn in the cycle. “The cycle has started to pick up in liability classes and will impact on margins,” Mr van Veen said.
The rates battle is interestingly poised, with QBE’s market strength giving it the edge in commercial lines while IAG and Suncorp hold the whip hand in personal lines.
“In personal lines, IAG’s and Suncorp’s duopoly gives them a degree of pricing power not shared by QBE,” Mr van Veen said.
For QBE CEO Frank O’Halloran, the biggest dilemma will be finding an acquisition avenue for growth. The strength of the Australian dollar may lead him to revisit IAG, says Mr van Veen.
As for Suncorp and IAG, with their relatively high exposures on the east coast, reinsurance is likely to present some tricky decisions.
Earlier this year, Suncorp reduced its exposure to natural catastrophes in the wake of a $280 million bill from weather-related claims in the second half of last year. It spent $15.2 million on a retention buydown program providing protection against hail, storm and bushfire to the end of the 2007/08 financial year. The reinsurance halved Suncorp’s maximum event retention to $100 million, dropping to $50 million for a further loss.
And IAG factored in a 25% increase on its normal $154 million allowance for adverse weather claims for the second-half of 2007/08.
Mr van Veen believes reinsurance price hikes may stymie IAG and Suncorp’s need to hedge against increased claims. “They will try and buy as much as possible at the right price but it may get too expensive,” he said.
But he remains optimistic IAG and Suncorp stock will bounce back, as the groups are trading on cyclical lows in terms of price-to-earnings ratios, which are “at the bottom of the range”.
It seems the only way is up.
It was truly an annus horribilis for finance sector stocks, which plunged 34.92% on the Standard & Poor’s/ASX 200.
QBE was the only insurer to better the overall market slide but still endured a 28% fall to finish the year on $22.40.
Suncorp ended last Tuesday at $13.04, down 35%, while IAG fared even worse, shedding 39% to end at $3.47.
QBE was ranked at 92 in the S&P/ASX 200, with Suncorp coming in at 116 and IAG bringing up the rear at 125.
The finance sector bore the brunt of the global credit meltdown, with the overall S&P/ASX 200 down a less drastic 16.9%.
The pain is likely to continue for listed Australian companies in the upcoming 2007/08 results season, with overall market earnings per share growth tipped to be as low as 1%.
And insurers are likely to suffer more than most, with UBS’ David Cassidy reported as predicting a 20% fall in insurance earnings.
Credit Suisse analyst Arjan van Veen agrees insurers are likely to suffer in the short term, primarily due to weather-related claims. “Earnings will be low mainly because of the storms but will bounce back in 09,” he told insuranceNEWS.com.au.
So how do insurers shore up their results in 2008/09 and, more importantly, demonstrate the improvement to their increasingly sceptical institutional and retail shareholders?
IAG faces the sternest test of the big three.
A Credit Suisse report issued last week highlights a host of challenges for new IAG CEO Mike Wilkins, most notably the adequacy of reserves, the mix of business (short-tail/long-tail, personal/commercial), dealing with large claims (reinsurance protection), investment return volatility and exposure to third parties.
Credit Suisse says Mr Wilkins needs to give the market some guidance “as to the cost savings likely to be achieved from the division restructure” he announced in April.
It says he also needs to issue a detailed trading update on the June commercial renewals season, clarify the impact of personal lines rate increases which have seen IAG lift motor premiums by 5% and update the market on NZ, where IAG has flagged 15-20% rate hikes in home insurance and $16 million savings from improved productivity measures.
Many analysts think Mr Wilkins will be forced to bite the bullet and cut IAG’s final dividend from 16c a share. But Credit Suisse doesn’t agree, saying the IAG board would come under intense pressure from disgruntled shareholders if they cut dividends in the wake of their rejection of QBE’s $8.7 billion takeover proposal.
“A cut in the dividend would seriously put in doubt the rationale for rejecting the IAG bid, and as such would have serious repercussions for the IAG board,” the report states.
Instead, Credit Suisse believes IAG is likely to underwrite an unchanged dividend – as are Suncorp and the majority of financial institutions – using a combination of franking credits and convertible preference shares.
The weakening investment markets have also taken a toll on IAG and Suncorp’s bonds, which have mark-to-market issues that will weaken their capital base. “They will have to mark their bond portfolios down,” Mr van Veen said.
All three insurers will feel the benefits of the upturn in the cycle. “The cycle has started to pick up in liability classes and will impact on margins,” Mr van Veen said.
The rates battle is interestingly poised, with QBE’s market strength giving it the edge in commercial lines while IAG and Suncorp hold the whip hand in personal lines.
“In personal lines, IAG’s and Suncorp’s duopoly gives them a degree of pricing power not shared by QBE,” Mr van Veen said.
For QBE CEO Frank O’Halloran, the biggest dilemma will be finding an acquisition avenue for growth. The strength of the Australian dollar may lead him to revisit IAG, says Mr van Veen.
As for Suncorp and IAG, with their relatively high exposures on the east coast, reinsurance is likely to present some tricky decisions.
Earlier this year, Suncorp reduced its exposure to natural catastrophes in the wake of a $280 million bill from weather-related claims in the second half of last year. It spent $15.2 million on a retention buydown program providing protection against hail, storm and bushfire to the end of the 2007/08 financial year. The reinsurance halved Suncorp’s maximum event retention to $100 million, dropping to $50 million for a further loss.
And IAG factored in a 25% increase on its normal $154 million allowance for adverse weather claims for the second-half of 2007/08.
Mr van Veen believes reinsurance price hikes may stymie IAG and Suncorp’s need to hedge against increased claims. “They will try and buy as much as possible at the right price but it may get too expensive,” he said.
But he remains optimistic IAG and Suncorp stock will bounce back, as the groups are trading on cyclical lows in terms of price-to-earnings ratios, which are “at the bottom of the range”.
It seems the only way is up.