Three Resilient Insurance Businesses & Mixed Signals; IAG, QBE & SUN

In Australia, the headwinds of adverse weather conditions have been prevalent for a while now, as the country is suffering from drought like conditions, posing a risk to insurance sector. Meanwhile, the record low interest rates are making the insurance players fetch lower returns on safe investments or fixed income investments.

Further, there could be more risks to insurance players exposed to the rage of California wildfires that have businesses in California, USA. In addition, the Hurricane Dorian has hurt Bahamas, North Carolina, Canada, and insurers are expecting economic damage to the tune of USD 1.5 billion in the US and Canada.

Westpac Banking Corporation (ASX: WBC) operates insurance business in its Consumer division, and New Zealand division. In its 2019 Annual Report, the bank mentions that weather related general insurance claims impacted earnings.

WBC also reported lower insurance income due to the impact of Protecting Your Super legislation along with higher claims.

Medibank Private Limited (ASX: MPL) has recently updated on the outlook for FY 2020. The company said it is experiencing higher than expected claims, resulting in a $21 million under provision from the claims reserve on 30 June 2019.

Medibank now expects an increase in claims per policy in the second half of FY 2019 and throughout FY 2020. It was said that higher claims have been driven by various factors, including higher private hospital payments, and elevated prosthesis costs.

More importantly, the company has voiced out opinion for a government reform to help health insurance companies to maintain affordability amid increasing costs within the healthcare system.

Recently, nib Holdings Limited (ASX: NHF) has reaffirmed its FY2020 guidance - underlying operating profit of ~$200 mn with a statutory net profit of ~ $180 mn. It is expected that the arhi’s net margin to be approx. 6% this financial year.

Considering this, let us look at three Resilient Insurance Businesses

Insurance Australia Group Limited (ASX: IAG)

In October, the company convened 2019 Annual General Meeting. Ms Elizabeth Bryan AM, Chairman of the company, stated that Board had welcomed six ethical suggestions by Commissioner Hayne through Royal Commission.

The company has been carbon neutral since 2012, and in 2019, it reduced greenhouse gas emissions by 22.6%, surpassing the target to lower carbon emissions by 20% by 2020. In addition, the company has made changes to its investment principles to support climate change objectives.

In its investment portfolio, the company has refrained from making investments into companies majorly mining thermal coal. In equity portfolio, the company has restricted investments into high-risk companies with poor risk-management.

Mr Peter Harmer, Managing Director and CEO of the company touched on the performance of the company in FY 2019. The company posted just over $12 billion in gross written premiums with a net profit after tax of just over a billion dollar.

In FY 2020, the company is expecting a low single digit growth in gross written premium, and anticipating a reported margin in the range of 16 per cent to 18 per cent. The net profit after tax is expected to include a profit of approx. $300 million, following the exit from Indian joint venture.

In October, the company has also agreed to sell its 26% interest in its SBI JB- SBI General Insurance Company . The transaction has reached an agreement with Napean Opportunities LLP and an affiliate of Warburg Pincus LLC.

In addition, the total consideration for the transactions was reported to be over $640 million, considering the exchange rates of October. It was said that the transaction would increase the regulatory capital position of company by over $400 million and net profit after tax by approx. $300 million.

On 8 November 2019, IAG was trading at $7.87, down by 0.51% relative to the previous close. Over the past one year, the stock has delivered a return of +11.57%. On a YTD basis, the stock is up by +14.47%.

QBE Insurance Group Limited (ASX: QBE)

QBE Insurance Group had declared an interim dividend of 25 cents per share with franked amount of 15 cents per share for the half-year ended 30 June 2019.

In 1 HY 2019, the group reported NPAT of $463 million, representing an increase of 29 % on previous corresponding period (pcp). The investment portfolio of the insurer delivered an annualised return of 6.8% during the period, up from 2.1% on pcp.

In continuing operations, the group reported a statutory NPAT of $479 million compared to $370 million in pcp, while discontinued operations reported a loss of $16 million.

The statutory cash profit after tax for the period was $520 million (Excluding amortisation of intangibles and other non?cash items), up by 35% from $385 million in the previous corresponding period (pcp)

Besides, the insurer undertook share buybacks worth $174 million in the half-year period, and it is continuing with the buyback program.

QBE has stated to emphasise on:

• The cell review process, and profit improvement plans in North America.
• Improvement in underwriting results in International and Australia Pacific.
• Delivery of first year cost savings as per the three-year plan.
• Delivering FY 2019 operating ratio in between 94.5% to 96.5%.
• Delivering FY 2019 net investment return in between 3% to 3.5%.

On 8 November 2019, QBE was trading at 12.91, up 1.73% relative to the previous close. Over the past one year, the stock has delivered a return of +12.3%. On a YTD basis, the stock is up by +28.83%.

Suncorp Group Limited (ASX: SUN)

In the full-year results for the period ended 30 June 2019, the group has posted net profit after tax of $175 million and cash earnings of $1.115 billion. The results were adversely impacted by the after tax non-cash loss on the Australian Life insurance business sale.

Despite this major headwind, the group declared final fully-franked dividend of 44 cents per share, taking the total full-year dividends to 70 cents per share. In May, the group paid special dividend of 8 cents per share from the proceeds of sale, and including special dividends total payments were 78 cents per share.

In FY 2019, the group’s largest division, Insurance Australia, delivered a profit after tax of $588 million, although this result was impacted by Townsville floods & Sydney hailstorm. It was mentioned that the severity and frequency of natural hazards events have increased over the past decade, resulting in access allowances for events.

The group’s banking & wealth business delivered profit after tax of $364 million, slightly lower than previous year, depicting slowdown in the housing markets and escalated competition. In New Zealand, the group delivered a profit after tax of $245 million, increasing 81% over the prior year.

Additional Shareholder Returns?

The group had announced a return of capital at 39 cents per share, paid in October this year, from the remaining surplus from the proceeds of life business sale. In October, the group also completed the sale of Capital S.M.A.R.T and ACM Parts business for $420 million, providing it with additional headroom. In addition, the group completed a reverse stock split at 0.971 for 1, meaning 971 shares to holders who had 1000 shares.

On 8 November 2019, SUN was trading at 13.34, up 0.60% relative to the previous close. Over the past one year, the stock has delivered a return of -3.60%.

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