Stocks’ Details
 

QBE Insurance Group Limited

 Robust financial position and reduced catastrophe exposure to provide stability: QBE Insurance Group Limited (ASX: QBE) has via a release declared its market update. The company said that it has worked on its portfolio simplification due to which it has got rid of the Insurance operations in Puerto Rico, Indonesia, and the Philippines. The company has also fully placed its 2019 reinsurance program which is structured to better suit the Group’s simplified portfolio and improving underwriting risk profile. The Group’s 2019 reinsurance program strikes an appropriate balance between cost, balance sheet protection, capital strength, and earnings volatility. Moreover, the company has announced a three-year operational efficiency program targeting net cost savings of $130 Mn and an expense ratio of around 14% in 2021.

The company had earlier stated its 1H 2018 results, in which a rise in the statutory net profit was witnessed at the rate of 4% on PCP. The statutory net profit came in at $358 Mn. This rise was achieved on the back of improvement in the attrition claims ratio to 51.30% from an earlier 51.80% for the PCP.

Also, the company’s financial position strengthened over the half year and hence Group’s PCA multiple strengthened to 1.74x from 1.64x at 31 December 2017 and debt to equity improved to 36.9% from 40.8% at 31 December 2017.
 
 

QBE’s Exposure forecast for the FY 2019. (Source: Company Reports)

On the financial metrics front, the company’s financial leverage for the 1H 2018 has reduced to a level of 0.37 times. Moreover, the company is trading at a price-to-book of 1.10x while the Industry median for Insurance players is 1.90x, hence a case of undervaluation. In the meantime, if we look at the past six months performance, the stock has gained by 2.25% as on 4 January 2019 and is trading at decent level. Hence, considering the decent financial position and reduced catastrophe exposure to provide stability, we maintain our “Buy” recommendation on the stock at the current market price of $10.23.
 

Suncorp Group Limited

Strong reinsurance program & growth in profit from functions: Suncorp Group Limited (ASX: SUN) has recently released its natural hazard update determining the expected financial impacts of the hazardous events for the 1H 2018. Post the weather which resulted in the hailstorm, the company has received 24,800 claims and an increment in this number is expected in the coming weeks.

Suncorp’s current estimates for natural hazard costs across Australia and New Zealand for the six-month period to 31 December 2018 is at around $600-610 Mn, pre-tax. Against this the natural hazard allowance which is to be provided is only $360 Mn. Thus $ 240-250 is the hazard cost which is slated to be above the allowance already made.
 
For the FY18, the group produced decent financial returns with a net profit after tax of $1,059 Mn. NPAT from functions grew by 4.8 per cent in FY18 and amounted to $1,263 Mn as compared to the previous year’s $1,205 Mn. The reported NPAT was marginally down by 1.5 per cent in FY18 against FY17 due to one-off investment in the acceleration of the marketplace component of the strategy during the same period and a four-fold increase in the regulatory costs. However, we believe that these investments will support to deliver a further uplift in shareholder returns in FY19.


 
SUN’s FY 2018 Financial Highlights (Source: Company Reports)
 
Meanwhile, the stock has fallen by 15.56% in the past 6 months as on 4 January 2019 and is trading close to lower level. Hence, considering the strong reinsurance program in place and decent financial performance, we maintain our ‘Hold’ rating on the stock at the current market price of $12.29.
 

Insurance Australia Group Limited

Subdued price performance coupled with lack of growth opportunities: Insurance Australia Group Ltd (ASX: IAG) has recently finalized its catastrophe reinsurance program for the 2019 calendar year. The program would provide increased gross reinsurance protection of up to $9 billion from the earlier $8 billion in the year FY 2018. IAG has increased the limit of its main catastrophe cover to $9 billion to provide additional protection above modelled exposure. IAG has experienced relatively flat reinsurance rates during the renewal process, with the overall expense outcome in line with the associated assumption in its FY19 reported margin guidance.
 
The company had posted subdued numbers for the FY 2018 on account of a marginal increase in gross written premium of 1.8% to $11,647 Mn. The underlying margin also saw a minor rise of 1.7% while the Net profits after tax saw a decline of 0.6% & stood at $923 Mn. Moreover, the company had earlier introduced a “capital management initiative” to distribute surplus capital to shareholders in the absence of significant operational demands for capital, which is a clear indicator that the company doesn’t have any growth or expansion plans at this point.
 

 
IAG’s Gross written premium trends (Source: Company Reports)
 
From analysis standpoint, the company is trading at a TTM P/E multiple of around 16.70 times, while the industry median is 15.90 times, thus we consider that the stock is expensive at this point of time. Meanwhile, the stock price has fallen over the past six months by 13.61% as on 4 January 2019. Hence, considering the subdued price performance in FY18 with no growth plans in place, we advice a wait & watch strategy on the stock at the current market price of $6.91.


 
Stock Price Comparative Chart (Source: Thomson Reuters)
 

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