Insurers: What About Youi?

This story features INSURANCE AUSTRALIA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: IAG

-Focus on volume, share
-More earnings downgrades?
-But dividend yield appeal
-Youi growing scale
 

By Eva Brocklehurst

Premium growth rates have eased for the major Australian insurers. Australian personal lines make up the bulk of Insurance Australia Group‘s ((IAG)) and Suncorp‘s ((SUN)) gross written premium (GWP), with the majority of increases in recent years from the home insurance segment. Brokers observe volume and market share now becomes the main focus in determining whether these insurers hit or miss their targets.

Large domestic insurers have underperformed significantly in recent months and Credit Suisse has restructured its preferences. QBE Insurance ((QBE)) experienced the largest consensus earnings downgrade after reporting season but the lack of significant bad news has meant its share price has re-rated. Credit Suisse now prefers Suncorp over IAG over QBE, noting the valuation gap has closed significantly in recent months. In the broker’s view IAG and Suncorp actually delivered slightly better-than-expected volumes in their results. 

While acknowledging they all have challenges, across personal lines, Credit Suisse remains comfortable in the ability of IAG and Suncorp to hold onto their portfolios in a soft market. Margins are being watched to determine the success of cost saving initiatives. IAG has historically delivered the highest margin but, after acquisition of the Wesfarmers‘ ((WES)) business, margins are diluted to below that of Suncorp. Credit Suisse urges caution about focusing solely on underlying margins, as these are open to manipulation of base assumptions.

QBE’s new structure protects it from two large events but the broker notes downside risk becomes significant after two events. Credit Suisse envisages upside risk to dividends from all three large insurers. QBE’s result did not impress, the broker hastens to add, but if reserving is no longer an issue then the large discount at which it was trading is no longer justified. Overall, there appears to be relative value in the three stocks but Credit Suisse is not getting carried away, remaining unconvinced that earnings downgrades are complete.

Deutsche Bank is also cautious, observing that growth in Youi‘s Australian market share in home and motor insurance – now 3.6% – has come largely at the expense of IAG and Suncorp. This increase in scale enhances Youi’s underwriting margins and capacity for growth, which in turn supports a view that current underlying margins will deteriorate in FY16 for both Insurance Australia and Suncorp.

With lower premium growth ahead and margin pressures emerging, Deutsche Bank believes it will be difficult for both IAG and Suncorp to generate earnings growth over the medium term. Despite this, the broker retains a Hold rating on both stocks. This reflects a low growth outlook that is already captured in the price, as well as the dividend yield appeal. QBE has a Buy rating and remains the broker’s top pick among Australian general insurers.

Youi is here to stay. The South African based company’s first half result revealed its disruptive impact on personal insurance lines in Australia, UBS observes. The company grew GWP by 42% compared to the contractions reported by Suncorp and IAG. Youi now represents 44% of parent Outsurance’s GWP, highlighting to UBS the significance of the company’s presence in Australia. Its growth in this country has not been all smooth sailing, with substantial natural peril losses reported for recent events in Queensland, while the company’s loss ratios ex catastrophes appear to UBS to be quite volatile half on half.

Outsurance has referred to Youi as its main growth driver and expects that brand to continue delivering strong premium growth and economies of scale. Youi moved into New Zealand last year and expects that market to provide a meaningful contribution to earnings. UBS observes, with over 60% of market share in NZ personal lines, Insurance Australia will have its work cut out across the Tasman for the next few years.
 

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