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The Aussie sharemarket has been moving south and further falls are likely over coming months.

However the recently released Australian Industry Group (AIG) Performance of Services Index (PSI®) offers investors a glimmer of hope.  While the Index came in below the magic 50 reading that separates economic expansion from economic contraction, the latest reading of 49.3 for January showed an increase of 3.2 points, reaching the highest level for this Index since March 2013.  In contrast, the AIG Performance of Manufacturing index for January fell for the third consecutive month to 46.7.

PSI sub-sectors – including retail and wholesale trade, hospitality, personal and recreational services, and property and business services – all remain entrenched in contraction territory.  The exceptions are health and community services with a reading of 63.5, and finance and insurance at 66.9.  The following chart from the AIG report compares the robust finance and insurance reading against the mediocre property and business services reading

Many investors are wary of the big banks.  A 2014 report from Goldman Sachs notes that the 22% increase in the ASX 200 bank index in 2013 left much of the sector overpriced.  Bloomberg concurs: share prices of the big four are currently trading at levels not seen since before the GFC, a full 75% higher than the MSCI (Morgan Stanley Composite Index) World Bank Index. 

Considering the currency concerns in emerging markets and uncertainty surrounding interest rates, the insurance companies could be the better play.  After all, businesses do not eliminate liability and casualty insurance in tough times and consumers do not cancel homeowners and health insurance.  With that in mind, here are six insurance and insurance related ASX stocks ranked by market cap:

Company

(CODE)

Market Cap

Share Price

(06/02)

52 Wk % Change

Forward P/E (FY 2015)

Dividend Yield (FY 2013)

3 Year Total Shareholder Return

5 Year Total Shareholder Return

Suncorp Group Ltd

(SUN)

$15.3b

$11.87

+18%

10.89

5.4%

17.8%

23.2%

QBE Insurance

(QBE)

$13,4b

$10.97

-11%

12.61

3.6%

(FY 2012)

-11.2%

-5.4%

Insurance Australia Group (IAG)

$11.2b

$5.38

+4%

11.96

6.4%

19.7%

14.1%

Austbrokers Holdings

(AUB)

$642m

$11.04

+28%

16.4

3.2%

28.2%

28.6%

ISelect Ltd

(ISU)

$1.36

-11%

15.03 (TTM)

Calliden Group (CIX)

$63.5m

$0.28

+65%

18.6

(TTM)

+5%

-3.2%

 

Suncorp Group Ltd (SUN) gives investors exposure to both insurance and banking.  The company offers commercial, general, personal and property insurance along with traditional banking and superannuation services.  Banking services reach commercial and corporate customers as well as consumers.  The company claims to be Australia’s “leading regional bank” with more than one million customers.  Suncorp pays a fully franked dividend with a yield for FY 2013 of 5.4%.  The dividend has doubled in the last two years, rising from $0.35 cents per share in FY 2011 to $0.40 in 2012 and $0.70 in 2013.  Analysts see a dividend payment this year of around $0.73 per share for an approximate yield of 5.7%.  The shares had a stellar year in 2013 but are down in early 2014.  Here is a one year price chart for SUN:

Suncorp has a solid track record of shareholder returns over the last five years.  There are 16 analysts covering the stock with 1 Underperform, 6 Holds, 5 at Buy, and 4 at Strong Buy.  CIMB Securities upgraded the stock from Neutral to Buy on 13 January, noting a possible 10% upside in 2014 and raised the target price from $13.21 to $14.10.

Investors in QBE Insurance Group (QBE) were enjoying a solid year in 2013 when the company went into a trading halt in early December prior to announcing an earnings downgrade.  The market reaction was ugly. Here is a one year price chart for QBE:

With the share price down around 10% year over year, is this stock worth a look?  QBE’s fiscal year closes in December so full year earnings come out on 26 February.  The company has already stated it anticipates a loss of around $250 million, largely due to write downs in US operations and additional claim reserves required. 

QBE is a global player, selling insurance to consumers and corporations in 46 countries.  The company also is a reinsurer in its US and European markets.  Reinsurers sell insurance to other insurance carriers, largely to protect against catastrophic losses.  QBE’s dividend history over the past three years is spotty at best, dropping from $1.28 per share in FY 2010 to $0.482 in 2012.  Analysts are decidedly mixed in their views, with 1 at Sell, 2 at Underperform, 7 at Hold, 4 at Buy, and 1 with a Strong Buy recommendation.  Following the December earnings downgrade JP Morgan upgraded the stock to Neutral from Underweight, believing QBE now has a more attractive P/E and is likely to benefit from lower interest rates and a weaker Australian dollar.  However, the analyst did caution that a newly appointed CFO at QBE may see the need for write downs.

By market cap Insurance Australia Group Ltd (IAG) is similar to QBE but its operational scope is limited to Australia, New Zealand, and Vietnam through branded products, and via joint ventures in Malaysia, Indonesia, and China.  In marked contrast to rival QBE, IAG actually raised profit guidance on 13 January, 2014.  That was the good news.  The bad news was a downgrade in forecasted premium growth.  A one year price chart for IAG shows market participants chose to focus on the bad news.  

The earlier drop in share price in the waning months of 2013 was the result of IAG’s decision to acquire Wesfarmers insurance underwriting operations with a capital raise to finance the purchase.  Analyst recommendations include 8 Hold recommendations, 2 Underperforms, 1 Sell, 3 Buys and 1 Strong Buy. Nevertheless, the company has the highest dividend yield of any stock in the table and a solid total shareholder return performance.  What’s more, IAG’s ROE (Return on Equity) for the trailing twelve months (TTM) of 23.1% dwarfs that of rivals Suncorp and QBE, with ROE’s of 3.53% and 4.36%.  Finally, dividends paid per share have more than doubled over the last two years, from $0.16 In FY 2011 to $0.36 in 2013.

Austbrokers Holdings Ltd (AUB) is in the underwriting and insurance broking business, meaning they work to find insurance products that meet client needs rather than relying on products from one company or brand.  The company serves all market segments, from personal to commercial to corporate.  This company may be small in size but it has produced outsized gains for its investors since it began trading on the ASX in 2005.  Here is a price movement chart for AUB’s trading history:

The company operates in Australia and New Zealand with a network of 46 broking groups in 130 different locations.  Three of the groups are wholly owned; 23 have company ownership interests ranging from 51% to 90%; and the remaining 23 are 50% owned by the company.  The company has made numerous acquisitions over the years and shows an impressive TTM Return on Equity of 23.6%.  Full Year results reported in August of 2013 were outstanding:

•    NPAT increased 61%

•    Revenues up 43%

•    EPS increased 13.65%

•    Dividends per Share up 14.5%

The company reported total shareholder return for FY 2013 of 61.7%. Following the release Macquarie, BA-Merrill Lynch, and UBS maintained Overweight and Buy ratings and increased target prices for the stock.  

ISelect Limited (ISU) operates an Internet based comparison service where consumers can compare a variety of insurance and related financial products as well as utility and broadband providers.  The company offers interested consumers a no-cost analysis of individual product needs along with a thorough review of available products.  This company is a virtual share market new-born, commencing trading on the ASX in June 2013.  Investors have not been kind, with an opening price of $1.76 coming in below the IPO offer of $1.86 and then falling more than 10% to close its first trading day at $1.56.  It has been a rocky ride ever since.  Here is the price chart:

Analysts are mainly concerned about low barriers to entry. In addition, there is already a private company with a comparison site in operation.  Not long after the IPO the accounting in the prospectus came under challenge and  ASIC stepped in to investigate, later exonerating the company but not before the CEO resigned and the company lowered the guidance outlined in the IPO prospectus.

Despite all this, Credit Suisse on 28 November maintained an Outperform rating on ISU with a target price of $2.00.  The analyst noted its strong brand, and its market position, but was concerned about lacklustre investor sentiment.

The final share in the table, micro-cap Calliden Group Ltd (CIX) had a stellar price appreciation in 2013, rising some 65%.  The company operates as a Managing General Agent (MGA) with two distinct business operations.  Calliden Insurance Limited is a traditional insurance provider operating through a number of underwriting agencies.  What appears to make the company unique is the Calliden Agency Services operation, which uses a digital interface, the Callibrate system, to allow the company to act as general agent for a wide variety of professional brokers.  The system makes it easy for brokers to evaluate and underwrite risk.  The company’s Full Year 2012 results started a prolonged uptrend in the stock price.  Calliden went from a FY 2011 loss of $10.2 million to a profit of $1.1 million for 2012, along with EPS (earnings per share) of $0.05, up from the prior year’s loss of $0.045.  Here is a one year chart for Calliden:

After a strong start, the share price has dropped about 30% over the last six months.  The company had told investors it anticipated FY 2013 profit of $10 million but in November management reduced guidance to between $5 and $7 million and the share price collapsed.  This stock may have potential, but with only one analyst covering it with a Strong Buy rating, CIX presents a challenge for investors who wish to follow the company.  

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