# Insurance Sector Discussion



## waz (2 August 2007)

Ive been searching around for threads on individual insurance companies and noticed not much has been posted about them lately.

Im trying to figure out why insurance companies have fallen so much over the previous week, most notably QBE (which rose today) and IAG.

I would have expected that insurance companies are slightly safer than banks given the credit problems.

I understand QBE may have issues, but then again the Au$ has dropped in the last week. Maybe its the fact that they still havnt made a takeover lately, its not mater of if but when. They may be able to get something on the cheap now.

Also, what does IAG have to do with the US, and for that matter the property industry. Not much.

People will still be paying for Green slips and comprehensive car insurance no matter what the economic climate. So their revenue should still increase (slighty), although while they are holding the funds, the returns on it may not be that great. 

What are your thoughts on the sector right now????


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## vicb (2 August 2007)

Interesting artical from the Herald sun

ANALYSTS are concerned that general insurers will disappoint investors this reporting season, with the three big listed players all under renewed pressure to meet earnings targets.

While miners such as BHP and Fortescue have increased in value by more than 50 per cent this calendar year, recent extreme weather in Australia and Britain have put the heat on the share prices of QBE, Insurance Australia Group and Suncorp. 

At the close of trading on the ASX yesterday, the three stocks were trading at or near their lowest levels in the past six months. 

Two of the worst performing members of the insurance index have been Suncorp and IAG, both of which flagged last month they will take big hits from claims relating to the June floods in NSW. 

Earnings growth is also being stymied because premiums for commercial insurance policies have continued to fall in the past six months in Australia. 

The aggressive price competition has been stoked by North American insurers and this is expected to have taken market share from the local players. 

"Anecdotal evidence indicates that competition in the commercial market place remains intense and that premiums are under pressure," said CommSec insurance analyst Carlos Castillo. 

"Those price decreases are going to offset the volume growth that occurs naturally when the economy grows." 

Rumours have been circulating in the market that Suncorp's commercial arm, Vero, has been losing market share since it was acquired as part of the $8 billion Promina acquisition earlier this year. 

Suncorp is under added cost pressure because it is now trying to integrate the Promina business. 

Some investors are nervous about the likely benefits of the acquisition and the share price yesterday fell 27 to $19.40. 

Suncorp scrip was trading above $22 when the deal was consummated earlier in the year. 

QBE, one of the darlings of the stock market, was also sold down yesterday with its shares sliding 22 to $29.97. 

QBE is staring down the barrel of some big losses stemming from the floods which have damaged property throughout Britain since last month. 

The company has significant exposure to the British property and liability markets and also operates a reinsurance syndicate in the Lloyds market. 

Although damage from the floods is still occurring, Standard & Poor's estimates that the final insurance bill for the British industry to exceed pound stg. 3 billion ($7.1 billion). 

This will make the English floods the second biggest insurance event on record behind the 1990 wind storms which wrought pound stg. 3.3 billion of damage. 

"The vast majority of these losses will be property-related, including business interruption, although motor and liability losses are also expected," S&P said in a report yesterday. 

"The profitability of the industry will undoubtedly be severely hit by these events." 

IAG has underperformed the ASX 200 Index for most of the past 12 months, generating a negative return of almost 10 per cent. 

The company will absorb a $160 million hit as a result of the NSW floods, but is likely to emerge from the British floods relatively unscathed. 

IAG recently entered the British market through the acquisition of Equity Insurance and Hastings. 

While there has been a surge in claims from policyholders affected by the English floods, BusinessDaily learned yesterday that IAG's direct exposure is relatively modest. 

Reinsurance arrangements mean that IAG's maximum exposure to the British floods is likely to be capped at about $5 million.


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## doctorj (2 August 2007)

Many insurance companies get hit twice during a correction.  First of all, obviously, whilst a rising tide lifts all boats, a falling tide does the same.  During a correction most stocks will pull back.

The second way insurance companies get hit is as a result of their investments.  Insurers in Australia are required by APRA to maintain a balance in cash and investments (bank bills, shares, bonds etc etc) proportionate to the estimate of claims they believe will be made in relation to their unearned/earned premiums.  These are discounted such that $1 held in cash contributes more to their minimum capital requirement (MCR) than $1 in shares, so in a falling sharemarket, insurers may be forced to liquidate positions in order to maintain their MCR. Finally, many insurers invest aggressively and a very significant portion of their profit comes from realised and unrealised gains made on these investments.

If you are looking to insurance as a defensive investment vehicle, look for insurers with conservative investment strategies, ideally ones that invest wholly in bank bills or something similar.


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## doctorj (2 August 2007)

One more thought I forgot to include is that it's important to remember all insurers are linked via reinsurance.  It's basically one big stack of cards with the likes of Lloyds and Munich Re at the bottom.  This means that the investment policies at the reinsurer level can impact everyone.  If a large reinsurer falls over, it will have wide reaching implications across the whole insurance industry and you'd be foolish to think that no insurance company has exposure to the US housing market (as an investment).


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## Kravis (2 August 2007)

You are right with your call on reinsurers, but the likes of Munich Re, Swiss Re Allianz Re and Gen Re etc..accept the risk of only proportionate classes of an insurers book. They do not take on the full risk of a particular class.
Insurance Companies nor would seek CAT coverage based on one Reinsurer. Australian regulation is strict on insurance - reinsurance requirements and possibly a little too conservative. However it does give confidence that they are well positioned and have enough reserving and 'insurance' to cover major cat losses if mother nature becomes a little unkind. 
Market fear has somewhat depressed quality businesses too far. But if you can ride it out and ignore the noise, there is no need to sell or shift out of the likes of QBE in Australia, Allianz in Europe or Berkshire Hathaway in the U.S.


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## doctorj (2 August 2007)

Kravis said:


> You are right with your call on reinsurers, but the likes of Munich Re, Swiss Re Allianz Re and Gen Re etc..accept the risk of only proportionate classes of an insurers book. They do not take on the full risk of a particular class.
> Insurance Companies nor would seek CAT coverage based on one Reinsurer. Australian regulation is strict on insurance - reinsurance requirements and possibly a little too conservative. However it does give confidence that they are well positioned and have enough reserving and 'insurance' to cover major cat losses if mother nature becomes a little unkind.
> Market fear has somewhat depressed quality businesses too far. But if you can ride it out and ignore the noise, there is no need to sell or shift out of the likes of QBE in Australia, Allianz in Europe or Berkshire Hathaway in the U.S.



You're right, APRA's regulations are harsh on insurers with a higher maximum event retention.

I gotta say, I didn't think it was outside the realm of possibility that an insurer would cede cat reinsurance with more than one reinsurer.

One point I want to stress, when investing in insurers, its worth knowing where they generate their revenues - favourable NELRs or getting lucky investing your premiums.


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## waz (2 August 2007)

vicb said:


> Interesting artical from the Herald sun
> 
> Rumours have been circulating in the market that Suncorp's commercial arm, Vero, has been losing market share since it was acquired as part of the $8 billion Promina acquisition earlier this year.




So if Vero is loosing market share, then who is gaining market share?


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## Kravis (3 August 2007)

I agree with your point doctorj. Thats why IAG who are heavily invested in Aust. stocks are a dog in my opinion. I mean that in the sense that they have the right branding and core systems/facilities set up but their strategy and execution is poor. This is only senior management to blame. They have taken so long to venture into international markets and they could have easily swallowed Promina but again too late to the game.


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## waz (20 August 2007)

QBE reported today, with nearly all its figures beating most analysts expectations, even my own.

Huge jump of 8.3% today in share price. Pretty good considered its not a very volatile stock as compared to the investment banks.
Also the low $ will help it along.

At the moment it looks like the only risk on QBE is the hurricane season.
If nothing major happens, it will probably start its uptrend towards $34 after october.


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## RFG001 (11 September 2007)

IAG a take over TARGET in my opinion, QBE the likely Giant that could take over, IAG is Australia's biggest insurance company and QBE would do a better job running it , our premiums would go up and so would QBE share price.


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## doctorj (31 October 2007)

RFG001 said:


> IAG a take over TARGET in my opinion, QBE the likely Giant that could take over, IAG is Australia's biggest insurance company and QBE would do a better job running it , our premiums would go up and so would QBE share price.



Given the current wave of M&A activity, I thought it was high time to bring this thread back from the dead.  Personally, I think we're still a ways off the end rationalisation in the industry - especially given where we are in the insurance cycle.

With the volatility in the market making life tough for companies that make a good portion of their bottom line from investments and margins and premiums getting quite narrow, the easiest way to growth appears to be M&A.  

Personally, I'm quite fond of the scenario you talk about and agree it's one of the more likely plays in the next 12 months in the sector.


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## Bill M (12 January 2008)

Just did a search and came up with this thread. IAG is off 40% from it's highs, is it oversold? A lot of storms and floods to pay for, does anyone think the dividend will be cut? Where to from here? I remember QBE languishing at $4.50 post 9/11, look at it now at $31.60?


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## brettc4 (22 January 2008)

*Insurance Sector*

Looking at a few stocks tonight, it appears to me that the Insuarance sector seems to have been hit harder than a number of others, shares like AXA, IAG and SUN seem to be down closer to 35-40% than the 20-25% since November.

We have the drought and now floods in QLD, but in a number of policies Flood damage is not included. 

Is it a fair assesment that this sector is being hit harder than others?

If so, any reasons why this sector is hit harder than others?

Cheers,
Brett


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## ROE (23 January 2008)

*Re: Insuarance Sector*



brettc4 said:


> Looking at a few stocks tonight, it appears to me that the Insuarance sector seems to have been hit harder than a number of others, shares like AXA, IAG and SUN seem to be down closer to 35-40% than the 20-25% since November.
> 
> We have the drought and now floods in QLD, but in a number of policies Flood damage is not included.
> 
> ...




I bought in SUN yesterday, below $14 something price is just the ticket for me. I love insurance most of my insurance stuff is with promina so may as well own the stock at great price. Love AAMI car insurance.

Insurance generally a good business as in they take your money now and pay later and use that money to invest, pay out when the claim comes in.

SUN is more than just insurance, they have a banking arm as well which is very unique not many company in Australia has banking and insurance in 1 hat ..


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## 3MT (23 January 2008)

ROE, i'm not sure about SUN. its a double whammy, involved in both financial and insurance sectors.

We won't further discuss how in trouble the financial sector is in, but with insurance, i believe companies like IAG actually invest premiums to generate returns (when not paying it out due to storms). I am concerned because I don't know where they invest the money. property trusts? AAA+ rated instruments insured by monoline insurers? shares? not a good time to be in insurers or small banks right now. I like to consider myself contrarian but I have to agree with the herd right now.

Good luck and hope you prove me wrong.


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## doctorj (23 January 2008)

3MT said:


> We won't further discuss how in trouble the financial sector is in, but with insurance, i believe companies like IAG actually invest premiums to generate returns (when not paying it out due to storms).



Spot on.



3MT said:


> I am concerned because I don't know where they invest the money. property trusts? AAA+ rated instruments insured by monoline insurers? shares?



Insurers are required to meet a minimum capital requirement (MCR) which is based on its (ummmm drawing a blank here... I think I'm right, but please correct me if I'm wrong) maximum event retention.  Their capital base is calculated based on all their investments and cash discounted for risk.  Their cash in the bank wouldn't get discounted, nor would their AAA+ bonds, but things like common stock and less favourably rated bonds wear a discount.  This has two impacts - first of all, as stock prices fall their profits on their investments falls and hence so does their bottom line.  Secondly, as stock prices fall (or as the counterparties on their bonds are downgraded) they may be required to sell stock and bonds for cash to meet their MCR which will probably reduce their returns in future periods (as cash won't return as much as the bonds or stock they sold).  Take a close look at annual reports of an insurer you're hoping to invest in - does their profit come from their insurance business or their investments?  That'll give you an idea of which are likely to be most heavily exposed.  Not all insurers go out and buy stock - I can think of a few so perhaps there are opportunities with the market mispricing the risk?



brettc4 said:


> We have the drought and now floods in QLD, but in a number of policies Flood damage is not included.



This comes back to the Maximum Event Retention (MER) I mention in the section above.  Even if insurers do cover floods and are liable, they all have reinsurance (they insurer most of their risk) which will limit their losses.  If you're looking at the annual report of an insurer that was exposed to a catastrophe during the period, you'll just notice some numbers in the p&l and bs that are bigger, but for the most part they'll net off (eg. claims expense vs reinsurance receivables)


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## ROE (24 January 2008)

3MT said:


> ROE, i'm not sure about SUN. its a double whammy, involved in both financial and insurance sectors.
> 
> We won't further discuss how in trouble the financial sector is in, but with insurance, i believe companies like IAG actually invest premiums to generate returns (when not paying it out due to storms). I am concerned because I don't know where they invest the money. property trusts? AAA+ rated instruments insured by monoline insurers? shares? not a good time to be in insurers or small banks right now. I like to consider myself contrarian but I have to agree with the herd right now.
> 
> Good luck and hope you prove me wrong.




I like Un-love stock .. I like to spread my love around to those who have none


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