Cover-More Offers Attractive Travel Insurance Exposure

This story features FLIGHT CENTRE TRAVEL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: FLT

-Strong growth outlook in Asia
-Significant partnership with Flight Centre
-Outsources underwriting risk
 

By Eva Brocklehurst

A new insurance company is gracing the lists at the Australian Securities Exchange and has caught the attention of brokers with the growth path on offer. Cover-More ((CVO)) is Australia's largest travel insurer with a 40% market share through agency, intermediary and direct channels. The company is a vertically integrated, pure travel insurer and boasts a model that doesn't require large capital input. Cover-More also provides medical assistance and is expanding its presence in India, China and Malaysia.

UBS and Macquarie are two brokers which have initiated coverage. UBS believes the company can deliver compound annual earnings growth of over 15% in the next three years and has a Buy rating and $2.25 price target. This growth is expected to be driven by incremental market share gain in Australia and New Zealand via potential distribution partners and the expansion of the Asian business, particularly in China. UBS notes the company has only recently entered this large, under-penetrated market so the growth upside is substantial.

The company is also capitalising on opportunities elsewhere, in its partnership with Flight Centre ((FLT)). Here, the success of Flight Centre, the company's closest and largest partner, will be a key input to Cover-More's growth in the medium term, according to UBS. A long-term joint venture arrangement ensures commercial interests are aligned to benefit both parties. There is some risk in this concentration, as UBS estimates Flight Centre writes more than 40% of the company's insurance gross written premium. Flight Centre is forecast to contribute 26% of Cover-More's earnings in FY14. So, Cover-More's profitability is highly correlated to Flight Centre's sales.

Key to the stock's attraction for the brokers is the fact that a travel insurance provider is now listed on the ASX, offering investors exposure to the outbound leisure travel market from Australia and New Zealand. UBS thinks there is potential to lift investment returns from the current 17% to 25% over the next three years. Macquarie expects the company's strength to be enhanced by leveraging e-commerce and product innovation, an example being a global SIM card and the upcoming launch of the Currency Card.

UBS cautions that Australian outbound travel growth is likely to moderate to 5-6% per annum from the 10% plus experienced over the last decade. This reflects more modest economic growth and a gradual depreciation in the Australian dollar. Both brokers observe the Australian travel market, therefore insurance, is heavily affected by discretionary consumer spending and the relative price of travel. In contrast, on the Asian front, UBS expects the increase in Indian and Chinese middle classes will drive growth in outbound travel to over 20% annually. Macquarie concurs, noting both these travel insurance markets should experience increased rates of growth as international travel is de-regulated and the population becomes more aware of the need for travel insurance.

Macquarie has an Outperform rating and price target of $2.30, which equates to 15.5 times FY15 forecast earnings and a 20% premium to the Emerging Leader industrials index. Macquarie believes this premium reflects Cover-More's superior financial characteristics and strategic growth opportunities in the target Asian markets.

The company's medical assistance business has global capacity and scale. Macquarie observes it handles over 540,000 calls and over 250 repatriations per year. The scale allows efficient case management and effective management of claims costs. The medical assistance business has a close relationship with the insurance side from which it derives around 60-70% of revenue. Control over the provision of medical assistance allows Cover-More to maintain high levels of customer service and, from Macquarie's perspective, this is critical for both the company and partners.

Risks come in the form of foreign exchange volatility, irrational competition that impacts on margin or pricing and the risk from the renewal of the current Munich Re underwriting agreement in 2018. Cover-More outsources all underwriting risk and, therefore, does not require regulatory capital. All the Australian underwriting risk is outsourced exclusively to Munich Re and Cover-More has similar agreements with underwriters in Asian markets.

Where do the competitors line up? UBS notes these include products backed by Allianz, QBE Insurance ((QBE)), Lloyd's and Insurance Australia Group ((IAG)). What else? Both brokers note the merging of DTC last year – an employee assistance and corporate health management program – could provide additional opportunities to vertically integrate and extract cost synergies from the medical assistance divisions. 
 

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