The Outlook For Oz Insurers

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-Further sector consolidation potential
-Margin expansion unlikely
-QBE reserve releases remain moderate 
 

By Eva Brocklehurst

It's been a relatively positive year for insurers so far with no extensive peril claims. Bond yields finished the September quarter little changed and credit spreads edged back. In keeping with the conservative image of the sector, brokers remain cautious and assume margins are unlikely to improve. There are some queries over the reduction in reserve buffering in various quarters but, given it appears to be a global trend, brokers are not unduly concerned.

So, what has the potential to excite interest in the sector in the months ahead, other than a natural peril?

BA-Merrill Lynch has observed that, while the general insurance sector is not that fragmented, there could be more consolidation in the wings. The broker looks at health insurer, nib Holdings ((NHF)), as a case in point. Merrills does not find the stock fundamentally appealing but accepts it could have corporate appeal as the health insurance segment consolidates. Merrills also subscribes to the break up of the more diverse Suncorp ((SUN)) in the longer term as well, and raises the question of whether Zurich might be a seller of segments, or whether Wesfarmers ((WES)) may consider offloading its Australian insurance business for that matter.

Credit Suisse suspects AMP ((AMP)) is one of better placed to obtain a small benefit from the rally in local equity markets in the September quarter, although at present the group is more skewed to international investment exposure. Offsetting any gains locally, nevertheless, is a decrease in the broker's expectations for AMP's life insurance margin. The strong local equity markets should enable Insurance Australia ((IAG)) to benefit from shareholder funds and this stock might acquire a slight benefit from a decline in credit spreads.

Suncorp has less exposure to equities compared with Insurance Australia and, given minimal impact from bond yields on the life insurance business, Credit Suisse has lowered the margin for Suncorp's life business further, on the assumption that the margin from new business will be minimal. Macquarie prefers Insurance Australia to Suncorp, given the level of reinsurance protection and zero exposure to life insurance. This is despite the broker's expectation that Insurance Australia will continue to invest in markets in Asia that do not return the cost of equity of the group and Suncorp will pay a FY14 special dividend of 15c.

Merrills thinks top line momentum for QBE Insurance ((QBE)) may come under pressure as the company rationalises its operating footprint. The company is continuing to exit Eastern European risk because of a lack of scale. The broker also suspects the company will review the aviation business (Lloyds) as to what parts it will continue to underwrite. In aggregate, Merrills expects QBE is wanting to exit more than GBP200m in gross written premium in Europe. In the US the broker is surprised that QBE intends to grow professional lines and aviation risk. The broker questions the former because of the particularly litigious nature of the US market as well as pricing trends. The aviation choice is also a surprise in the context of the Lloyds experience, although the focus in the US is more likely local than global. QBE will need to act aggressively on costs to protect margin, in the broker's view.

Macquarie believes the negative reserve development from prior years is not likely to be an ongoing feature for QBE. There has been some concern about the reduction in reserve buffering, because of favourable weather. The level of underlying positive reserve releases is expected to be moderate, given the company's shifting business mix and general industry trends. Macquarie concludes that QBE is consistent with other global insurance companies and the domestic listed insurers in lessening the underlying reserving buffer, and it also reflects the shift in the QBE business mix to shorter tail classes over time.

CIMB recently looked at QBE's lender-placed insurance business and compared it with nearest key competitor Assurant. The broker finds favourable weather led to reduced buffering and revenue growth being significantly behind peers. The 2013 margin guidance is considered achievable but reliant on favourable outcomes. Credit Suisse made no changes to forecasts on the back of benign weather in the September quarter, maintaining QBE's allowance of 10.5% for large and catastrophic claims. Based on current share prices, QBE remains the broker's pick in the sector and while the macro environment has turned negative in recent weeks underlying improvement is seen the key in driving earnings higher.
 

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