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1、13 September 2012Asia Pacific/AustraliaEquity ResearchProperty&Casualty InsuranceInsurance Sector,Research AnalystsJohn Heagerty61 2 8205 4537john.heagertycredit-Andrew Adams+61 2 8205 4106andrew.adamscredit-,TECHNICAL ANALYSISSeeing clearly now the rain has gone Seeing clearly:Most of the key issue
2、s facing the insurance sector havebeen addressed(reinsurance,capital,premium rates,etc)and the recent,share price strength appears to reflect this.QBE is the only stock that lookssignificantly under-valued,in our view,and remains our only OUTPERFORMin the sector(TP$14.20).However,we believe that the
3、 defensive quality ofGI(providing relative earnings certainty)combined with an uncertain marketenvironment could see the domestic stocks overshoot fair value in the nearterm,hence our NEUTRAL ratings on IAG(TP$4.00)and SUN(TP$9.00).Stock valuations:Despite the recent sector outperformance,the only s
4、tocktrading significantly above its five-year average P/E is SUN on 10.9xcompared to an average of 10.0 x,although we would argue that this reflectsde-risking in recent years.QBE is trading at the largest discount to itshistorical average(-12%)on 9.4x compared with an average of 10.7xreflecting unce
5、rtainty around their specialist lines businesses,in our view.IAG and SUN are trading close to their averages on 11x and 13x,respectively.Sector valuation where to from here?In our view,the sector couldcontinue to move higher in an uncertain market and overshoot fair valueover the next six months.Eve
6、n if a switch into resources(the most under-valued sector)were to occur,we believe this would be funded from moreover-valued defensives such as telcos and consumer staples,particularlyconsidering the relative earnings growth and certainty(catastrophes aside)that the GI sector provides.Key sector the
7、mes:Assessing GWP growth,investment income andunderlying margins continue to reveal interesting disparities between IAGand SUN.Although IAG delivered a strong result and a confident outlook,this appears to be included in consensus EPS.By contrast,consensusforecasts a declining insurance margin for S
8、UN and lower organic GWPgrowth,which is at odds with the strong momentum in 2H12,indicatinggreater potential for earnings upgrades,in our view.The main headwind islower investment income following the fall in the three-year govt.bond yield.Balance sheet issues addressed:Perhaps the key highlight of
9、the resultwas strong balance sheets presented by all insurers.IAGs MCR of 1.74xwas the strongest and should therefore accommodate transition to LAGICand potential pay-down of some hybrid instruments.SUN finally delivered aspecial dividend(15cps)from its surplus capital and by our analysis shoulddeli
10、ver further specials over the next couple of years.QBEs MCR at 1.54xwas arguably the weakest but CET1 ratios are healthy and we forecast aPCA ratio of 1.55x at 31 December 2012.DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS.U.S.Disclosure:Credit Suisse does and
11、 seeks to do business with companies covered in its research reports.As a result,investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report.Investorsshould consider this report as only a single factor in making their investment decision.,
12、CREDIT SUISSE SECURITIES RESEARCH&ANALYTICS,BEYOND INFORMATIONTMClient-Driven Solutions,Insights,and Access,3,7,12,15,16,20,20,21,22,25,35,38,40,42,42,43,44,47,49,50,52,55,56,63,66,69,72,74,2,13 September 2012Table of contentsExecutive summary#1 GWP growth,AustraliaNew ZealandQBE GWP guidance declin
13、e#2 Underlying marginsCurrent positionIAG versus SUN on a full-year basisQBE margin recovery#3 Investment income(tech funds)IAG sensitivity changesSUN inflation linked bonds noiseQBE yield pressure continues#4 Shape of balance sheetsIAGSUNQBEComparing the insurers capital positionsIAG reconciling FY
14、13 guidanceThe FY13 earnings liftCapital confusing but comfortingSUN questions slowly answeredGeneral insurance no credit for lack of clarityCore bank surprise increase in impairmentsNon-core bank provisioning sufficient?QBE conservative or issues?Claims deteriorationInvestment income potential for
15、another leg downBalance sheet stronger but POA still tightValuation and financialsCurrent multiplesThe insurance sector within a portfolioSo where to from here for the insurers?IAG focus charts and earnings forecastsQBE focus charts and earnings forecastsSUN focus charts and earnings forecastsAppend
16、icesAppendix A:Global P&C key financial metricsAppendix B:Australia and New Zealand large eventsInsurance Sector,712151825313438475272,1),3,13 September 2012Executive summary,A continuation of benign weather and the earn-through of premium rate rises has seen thegeneral insurers come back in favour
17、and deliver share price outperformance versus theASX200 YTD.Yet despite this recent outperformance,the insurance sector looks fairlyvalued and only QBE stands out as representing value against historical averages.As wellas analysing relative stock and sector valuations,this report examines the secto
18、rsdefensive earnings drivers and improving balance sheet metrics that have boostedconfidence in the sector.A summary of our key analysis is as follows.Trading multiples not as full as expectedDespite sector outperformance recently,the only stock that is trading significantly aboveits five-year avera
19、ge P/E is SUN on 10.9x compared with an average of 10.0 x,althoughwe would argue that this largely reflects the considerable de-risking that the business hasundergone post the financial crisis.QBE is trading at the largest discount to its historicalaverage(-12%)on 9.4x compared with an average of 10
20、.7x reflecting a disappointingcouple of years earnings and some uncertainty around their specialist lines businesses.AMPs 6%discount to its five-year average is largely a result of the de-rating that hasoccurred within the wealth management sector,in our view.,A continuation of benignweather and the
21、 earn-through of premium raterises has seen the generalinsurers come back infavour and deliver shareprice outperformance versusthe ASX200 YTD,Figure 1:Current vs.five-year average P/Es,Figure 2:P/E relative to the market and five-year median,15.014.013.0,13.8x13.4x,12.5x,10%5%0%,6.5%,6.6%,12.011.010
22、.09.08.0,11.7x11.3x,10.9x10.0 x,10.7x9.4x,12.5x,-5%-10%-15%-20%,-10.6%-10.0%,-13.3%-18.5%,-15.9%,7.0,-25%,-25.0%,6.0,AMP,IAG,SUN,QBE,ASX200 Industrials,-30%,AMP,IAG,SUN,QBE,Current PE,5 year average PE,Current PE relative to the market,5 year median,Source:I/B/E/S,IRESS,Credit Suisse estimates,Sourc
23、e:I/B/E/S,IRESS,Credit Suisse estimates,Given the uncertain environment it is understandable that relatively defensive sectors arecurrently being bid up.So despite the recent outperformance of the insurance sector andour argument that the stocks and the sector currently look fairly valued,it is noti
24、nconceivable that the insurers could continue their upward trajectory given the lack ofalternative quality options available for investors.In this situation,the insurance sectorcould well enjoy a period of relative outperformance and over-valuation(relative to its ownhistory)while investors remain d
25、efensive,particularly now that some of the key issuesfacing the sector appear to have largely been addressed(reinsurance,capital,premiumrates,etc).However,should there be a switch into resources,which is currently the most under-valued sector,we believe that banks,telcos,consumer staples and healthc
26、are stocks aremore likely to be funding sources than the insurers given the growth potential of the GIsector over the next 12 months.Domestic cyclicals are generally trading below their long-run averages already but are likely to stay there or potentially trade at even greaterdiscounts due to the he
27、adwinds facing the sector from a slowing domestic economy.Assuch,we believe that the GI sector is likely to overshoot fair value in the next six months.However,once the sector reaches 1 std above its long-run average(another 10%),thiswould be a good tipping point,in our view.Insurance Sector,Despite
28、 the recentoutperformance of theinsurance sector and ourargument that the stocksand the sector currently lookfairly valued,it is notinconceivable that theinsurers could continue theirupward trajectory given thelack of alternative qualityoptions available forinvestors,2),3),4,13 September 2012Figure
29、3:Current P/E v five-year average for the main sectors within the ASX20022.0,20.018.0,20.4x,16.0,16.2x,15.1x,16.1x,15.0 x,14.012.010.08.0,19.3x,17.5x,17.1x,16.4x,15.8x,14.1x13.7x,13.5x13.6x,12.5x13.1x,11.7x13.0 x,10.5x12.7x,12.3x11.1x,11.3x11.0 x,10.1x,11.7x10.1x,10.9x,12.5x10.8x12.2x,6.0Current PES
30、ource:I/B/E/S,IRESS,Credit Suisse estimatesGWP growth clearly coming through now,5 year average PE,6.5x,Evidence of strong premium rate increases is now clearly visible in the insurers earnings.The Australian home and New Zealand property markets have been the driver of largepremium rate increases w
31、ith evidence that QBEs international portfolio is also starting tobenefit from premium rate increases.The GWP increases will assist in providing revenuegrowth in the near term as the premiums earn through the book,giving investors comforton earnings growth in FY13(catastrophes aside).While IAG impre
32、ssed with 11.7%GWP growth in FY12,excluding acquisitions(HBF,A&HI,AMI),the growth was 9.1%,just below the 9.3%experienced by SUN.However,by ourcalculations,IAGs organic personal lines growth was fairly weak at 4.8%,boosted bysignificant growth in its Australia Direct business(+10.5%)but offset by th
33、e personal linesbusiness lost in CGU(-18%).Figure 4:IAG personal lines GWP growth,Evidence of strong premiumrate increases is now clearlyvisible in the insurersearnings.The Australianhome and New Zealandproperty markets have beenthe driver of large premiumrate increases,A$mnAustralia DirectCGU perso
34、nal lines(excl HBF)Total personal lines,FY113,8919854,876,FY124,2998105,109,Change10.5%-17.7%4.8%,Source:Company data,Credit Suisse estimatesWith less detail provided by SUN on its general insurance performance,it appears thatconsensus forecasts are more conservative for SUN than IAG.IAGs GWP guidan
35、ce forFY12 is 9-11%with consensus at 10.2%.The AMI acquisitions equates to 2.5%,implyingjust over 7.5%organic growth.Consensus for SUN is for 6%GWP growth despite SUNarguably finishing the period with better momentum than IAG.Insurance margins a mixed result with a positive outlook,For the past six
36、months,based on company disclosures,SUN has reported a significantimprovement in its underlying margin while IAGs has held flat and QBE has experienced aslight deterioration.Given IAGs already healthy margin,a focus on volume growth wasunderstandable.However,we note that IAG caught up to SUN in 2H12
37、 with regards topremium rate increases which should be evidenced in margin improvement in FY13 and iscurrently assumed in consensus forecasts.Insurance Sector,SUN reported a significantimprovement in itsunderlying margin whileIAGs held flat and QBEexperienced deterioration,-,-,-,4),2.00,5,13 Septemb
38、er 2012Figure 5:Underlying margin analysis six months to 30 June 2012,IAG-2H12,SUN-2H12,QBE-1H12,NEP,$mn3,683,%of NEP,$mn3,445,%of NEP,US$mn7,359,%of NEP,Insurance profitLess reserve releasesAdd back natural perilsLess natural perils allowance,566-110262-314,15.4%-3.0%7.1%-8.5%,382-112389-260,11.1%-
39、3.3%11.3%-7.5%,958177589-773,13.0%2.4%8.0%-10.5%,Add reinsurance reinstatement,0.0%,0.0%,0.0%,Credit spreadsDAC/LAT/FXAdd normalised reserve allowance,-1055,-0.3%1.5%,37-3852,1.1%-1.1%1.5%,-169206,-2.3%2.8%0.0%,Underlying marginPrior half underlying marginUnderlying margin movement,12.2%12.2%0.0%,13
40、.1%11.1%+2.0%,13.4%13.8%-0.4%,Source:Company data,Credit Suisse estimatesNote:IAG excludes UK and Asia for comparative purposes,SUN exited FY12 with an underlying insurance margin of 13.1%with further costs savingsflagged for FY13,but consensus expects the insurance margin to decline in FY13 fromthi
41、s level.This is at odds to the improvement expected for IAG.Arguably,this indicates thepotential for more upside surprise to SUNs FY13 earnings compared to IAG.,The improvement expectedfor IAG in FY13 arguablyindicates the potential formore upside surprise to,Figure 6:IAG versus SUN consensus assump
42、tionsGWP growth,Insurance margin(underlying),SUNs FY13 earningscompared to IAG,A$mnIAG(excl acquisitions)SUN,FY129.1%9.3%,FY13F7.7%6.0%,2H1212.0%13.1%,FY13F12.4%12.0%,Source:Company data,Credit Suisse estimatesInvestment income an earnings headwindInvestment income has held up relatively well over t
43、he past 12 months with credit spreadexpansion assisting to offset some of the fall in underlying bond yields.However,this hasreversed in recent months and all insurers have called out investment income pressureover the next year.,Figure 7:Australia three-year bond yields6.506.005.505.004.504.003.503
44、.002.502.001.50Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12,Figure 8:Australia 3Y yields rolling three-year average6.506.005.505.004.504.003.503.002.50,1/07/2009,1/01/2010,1/07/2010,1/01/2011,1/07/2011,1/01/2012,1/07/2012,3YrAus AA,3YrAus A
45、AA,Aus 3Yr Govt,Aus 3Yr AAA,Aus 3Yr AA,Source:Bloomberg,Credit Suisse estimates,Source:Bloomberg,Credit Suisse estimates,IAG and SUN have roughly the same duration assets but SUN invests in inflation-linkedbonds and also has the offsetting hedge from life insurance.At a high level QBE has themost ex
46、posure to changes in bond yields.However,with their running yield at 3%versusover 5%for IAG and SUN,we note that the absolute movement of 25bps is moresignificant in relative terms but is also less likely to occur given that cash rates are alreadyclose to zero in Europe and the US.Insurance Sector,$
47、14.20,6,13 September 2012Figure 9:Sensitivity to a 25bps decrease in yields,$m,Fixed,%tech,%Insurance Sensitivity,Group Sensitivity,interest,reserves s/holders,profit,NPAT,funds,IAGQBESUN,11,56028,12810,957,100%100%100%,60%92%76%,1,1852,041889,-2.0%-2.4%-2.4%,6841,446977,-3.0%-3.7%-2.0%,Source:Compa
48、ny data,Credit Suisse estimates5)Balance sheets confusing comfort,Looking at the general insurers collectively,we find that capital positions are looking farhealthier now than just six months ago.At a simple level,MCR ratios are all over 1.5x withQBE being the lowest at 1.54x and IAG the highest at
49、1.74x.Even at a tangible equityratio level,all the insurers look comfortable,although IAG on 62%is below its peers at76%(QBE)and 79%(SUN)but within its own target range of 60-70%.IAGs decision to partly debt fund the acquisition of Kurnia(off balance sheet),as well aslower the bottom end of their ta
50、rget MCR ratio to 1.4x(from 1.45x),has released thepressure on the equity component of IAGs capital,in our view.We expect QBE to be at1.6x at 31 December(1.55x under new LAGIC)and should they also decide to lowertheir target ratio,this would leave them well above their own minimum requirement.SUN fi
