I. Sector Landscape

The asset management and insurance sector has grown leaps and bounds post the COVID-19 crisis. During the September 2021 quarter, the aggregate managed funds industry expanded by 1.4% (+$61.2 billion) and clocked $4,390.3 billion in funds under management. The consolidated assets of managed funds institutions surged by 2.1% (+$73.1 billion) and stood at $3,515.4 billion. Subsequently cross invested assets and unconsolidated assets advanced to $571.2 billion (+2.9% QoQ) and $4,086.6 billion (+2.2% QoQ), respectively.

Figure 1: Sources of Funds into Managed Funds Industry (in $Bn):

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Performance of General Insurance Industry

Industry’s Improved Profitability: As per the release by APRA, for the year ended 30 September 2021, the general insurance industry clocked $944 million in NPAT, up by 4.5% YoY and 3.2% in return on net assets. The bottom line was considerably supported by improved underwriting results, while investment income remained subdued. Insurance companies recorded a higher gross earned premium of $55.6 billion within the underwriting results, up by 7.4% YoY, primarily driven by business from householders, fire & ISR, domestic motor, and professional indemnity.

Total Assets of Life Insurance Corporations: According to the recent release by the ABS, the total unconsolidated assets of life insurance corporations advanced by $0.9 billion (+0.7% QoQ) and stood at ~$129.0 billion in the September 2021 quarter. The favourable movements were primarily attributed to a 5.7% increase in other financial assets, 0.9% jump in units in trusts, and 1.3% incline in bonds and other assets, while constrained by an 11.0% drop in deposits and 14.0% contraction in short term securities.

Figure 2: Key Performance Indicators of General Insurance Industry

Source: Based on Australian Prudential Regulatory Authority (APRA) Data, Analysis by Kalkine Group

Update on Superannuation Funds and Other Managed Funds

Superannuation (Pension) Funds: In September 2021 quarter, the total unconsolidated assets under superannuation funds surged by $76.4 billion (or +2.3% QoQ) and clocked $3,430.5 billion. Fundamental movements include a 2.6% uptick in units in trusts, 4.2% incline in overseas assets, 4.7% advancement in land, buildings & equipment, and 3.9% edge up in other financial assets.

Figure 3: Growth Rate Trend of Superannuation Funds’ Assets

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Public Offer Unit Trusts and Other Managed Funds: Total unconsolidated assets under public offer trust expanded by $12.6 billion (+2.7% QoQ) and clocked $476.5 billion in September 2021 quarter. Cross investments within the public offer unit trusts increased by $2.6 billion (+6.6% QoQ) and stood at $41.6 billion. Additionally, total unconsolidated assets of friendly societies edged up by 3.0%, common funds jumped by 2.3%, and cash management trusts slipped by 3.5%.

Index Performance:

The ASX 200 Financials (GIC) Index posted 1-year returns of ~+6.30% compared to ~0.85% by the ASX 200 Index. Increasing compensation of employees, rising asset position in superannuation funds, improving financial statistics of general insurance industry, and stable monetary policy in place, have contributed to the sector growth.

Figure 4: The ASX 200 Industrials Index (GIC) outperformed the ASX 200 Index in the past one year by ~5.45%:

Source: REFINITIV as of 27 January 2022

Key Risks and Challenges

Although managed funds have diversified into overseas assets, the global pandemic has not ceased yet, so systematic risks are dominant. In September 2021 quarter, the investment income in the general insurance industry slipped by 56.4% QoQ, signaling contraction in invested assets. In December 2021 quarter, over the 12 months, CPI surged by 3.5% - signaling a potential increase in interest rates and contraction in asset prices. As interest rates are expected to remain low, investors’ risk appetite is scaling up; some asset prices appear overvalued, and a price fall can fabricate a snowball effect with a potential increase in default rates. Continued financial operations in low-interest-rate conditions may pose a high repricing risk for Authorized Deposit-taking Institutions (ADIs).

Figure 5: Key Risks and Challenges

Source: Analysis by Kalkine Group

Outlook

Lower Gross Incurred Claims: The lower costs of gross incurred claims were reported in the householders’ segment, reflecting the curtailed incidence of catastrophe events and the reinsurance businesses.

Resilient Wage Growth: 3.3% growth in compensation of employees in the September 2021 quarter has culminated into a substantial contribution in superannuation funds, signaling a recurring incremental trend.

Finalization of a New Bank Capital Framework: The Australian Prudential Regulation Authority has devised its new bank capital framework to build solid capital levels and align Australian standards with Basel III requirements.

ADI’s Total Residents Assets Continues to Grow: Total residents assets increased by $46.0 billion or 1.0% in November 2021, primarily driven by robust growth of 0.9% in owner-occupied lending and 1.6% in non-financial businesses lending.

Improved Investment Housing Lending: In November 2021, Investment housing lending surged by $2.0 billion or 0.3%. The sustainable growth in housing lending continued to signal robust borrower demand bolstered by low-interest rates.

II. Investment theme and stocks under discussion (IAG, LFS, GMA, KSL)

After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘Price/Book Value’ multiple method.

1. ASX: IAG (Insurance Australia Group Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$10.52 billion)

Insurance Australia Group Limited (ASX: IAG) operates a general insurance business in Australia and New Zealand with segments – Direct Insurance Australia, Intermediated Insurance Australia, and New Zealand.

Valuation

The illustrative valuation model suggests that stock has a potential upside of 17.65% on 27 January 2022. Moreover, the stock might trade at a slight premium compared to its peers’ average Price/Book Value (NTM trading multiple) given decreased loss ratio and improved GWP. For valuation, peers such as Suncorp Group Ltd (ASX: SUN), AUB Group Ltd (ASX: AUB), NIB Holdings Ltd (ASX: NHF), and others have been considered. Given the prudent liquidity levels, a substantial increase in GWP, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the current market price of $4.225, as of 27 January 2021, at 02:10 PM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 4.68%.

2. ASX: LFS (Latitude Group Holdings Limited)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$2.06 billion)

LFS is involved in instalments and lending business covering Australia and New Zealand. In addition, the company offers personal loans, credit cards, vehicle loans through designated channels.

Valuation

The illustrative valuation model suggests that stock has a potential upside of 19.62% on 27 January 2022. Moreover, the stock might trade at a slight premium compared to its peers’ median Price/Book Value (NTM trading multiple) given suppression of containment measures and improved volume expectations. For valuation, peers such as WISR Ltd (ASX: WZR), Credit Corp Group Ltd (ASX: CCP), Humm Group Ltd (ASX: HUM), and others have been considered. Given the high volumes from the ANZ region, favourable cost deductions, current trading levels, upside indicated by valuation, and key risks associated with the business, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $1.965, down by ~1.257%, as of 27 January 2021. In addition, the stock has delivered an annualised dividend yield of 8.04%.

3. ASX: GMA (Genworth Mortgage Insurance Australia Limited)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$897.05 million)

Genworth Mortgage Insurance Australia Limited (ASX: GMA) engages in the Loan Mortgage Insurance (LMI) business that offers LMI through flow and portfolio, primarily from a high loan-to-value residential mortgage in Australia.

Valuation

The illustrative valuation model suggests that stock has a potential upside of 18.97% on 27 January 2022. However, the stock might trade at some discount compared to its peers' average Price/Book Value (NTM trading multiple), considering the impact of recent lockdowns and uncertain economic risks. For valuation, peers like Humm Group Ltd (ASX: HUM), Suncorp Group Ltd. (ASX: SUN), Challenger Ltd (ASX: CGF), and others have been considered. Given the current trading levels, decent balance sheet position, expected improvements in the housing market, strategic borrower support programs, current trading levels, indicative upside in valuation, and key risks associated with the business, we give a ‘Speculative Buy’ rating on the stock at the current market price of $2.405, as of 27 January 2021, at 2:06 PM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 2.29%.

4. ASX: KSL (Kina Securities Limited)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$239.59 million)

KSL operates as a diversified financial services company. KSL is based out of Papua New Guinea and provides share brokerage, fund administration, investment management, and other relevant services.

Valuation

The illustrative valuation model suggests that stock has a potential upside of 18.68% on 27 January 2022. However, the stock might trade at some discount compared to its peers’ average Price/Book Value (NTM trading multiple) given the dissolution of the acquisition proposal to Westpac Bank PNG Limited and drained net interest margin. For valuation, peers such as Bank of Queensland Ltd. (ASX: BOQ), Judo Capital Holdings Ltd (ASX: JDO), National Australia Bank Ltd (ASX: NAB), and others have been considered. Given the healthy growth in loan books, progression in digitalisation, current trading levels, upside indicated by valuation, and key risks associated with the business, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $0.840, up by ~0.598%, as of 27 January 2021. In addition, the stock has delivered an annualised dividend yield of 9.10%.

Note: All the recommendations and the calculations are based on the closing price of 27 January 2022. The financial information has been retrieved from the respective company’s website and REFINITIV.  

Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and is subject to the factors discussed above.

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