In the past weeks, good news stories have hit the headlines. Here are a few rays of sunshine:

•    On 05 March the ASX hit a five-year high, with All Ordinaries closing at 5,457 and the ASX 200 at 5,446.

•    Figures released by the Bureau of Statistics show GDP (gross domestic product) grew 0.8% in the December Quarter, raising the annual rate of growth to 2.8%.  This beat economic forecaster expectations of a 0.7% increase for the quarter and 2.5% for the year.

•    The Australian Industry Group Australian Performance of Services Index (Australian PSI®), which showed a January reading below expansion at 49.3, shot up to 55.2 for January, an increase of 5.8 points. The 55.2 reading has not been that high since March of 2008 and is the first expansion reading (above 50) since January of 2012.

•    The AIG Performance of Manufacturing Index, while still below contraction, rose to 48.6 in February, up 1.9 points from the January reading of 46.7.  The reading had declined for three consecutive months before the current reading broke the trend.

•    Despite the contraction in mining investment spending, the mining sector still contributed most to GDP growth at 0.6%, followed by financials and insurance at 0.5%.

•    The detail confirms that mining output and export earnings are currently the key drivers of growth, taking over from mining investment in previous quarters.

•    The number of full-time employed jumped by 80,500 in January, the biggest increase since 1991.

•    Wesfarmers is reported to be ready to take advantage of investor interest in diversified financial offerings by going public with its OAMPS insurance broking business in a deal already touted as “one of the biggest floats on the ASX in 2014.”

Buried in the overall performance of the Australian PSI is the leading sub-sector performance from financials and insurance.  The potential OAMPS IPO (initial public offering) and the $1.85 billion dollar deal in the works for IAG to buy Wesfarmers insurance underwriting business suggests this already hot sector could get hotter.  On 26 March the Coalition government stepped up the heat, announcing its plans for a reported $4 billion IPO of government owned Medibank Health Insurance.

Investors can either wait for the IPO’s to come on board or handpick from a number of insurance stocks already listed.

Three insurance companies went public in 2013. The following table summarises share price performance of the three:

Company

(CODE)

Issue Date

Issue Price

1st Day Trading Opening Price

1st Day Trading Closing Price

27 March Share Price

Market Cap

Steadfast Group Ltd

(SDF)

02 August 2013

 

$1.15

 

$1.35

 

$1.42

 

$1.50

 

$748m

Cover-More Group Ltd

(CV0)

19 December 2013

$2.00

26 December 2013

$1.77

 

$1.79

 

$2.08

 

$660.4m

ISelect LTD

(ISU)

24 June 2013

$1.85

$1.76

$1.56

$1.15

$301.3m

 

Insurance broking house Steadfast Group Ltd (SDF) spiked quickly, but as you can see from the following price chart, travel and medical insurance provider Cover-More Ltd (CVO) is leading the charge. 

Both have reported exemplary financial results.  Analysts at Macquarie and JP Morgan liked Steadfast’s interim results (reported on 25 February) and expect the company to meet financial guidance outlined in the IPO prospectus.  With an Outperform rating, Macquarie raised its price target from $1.60 to $1.80.  JP Morgan has an Overweight rating and raised its price target from $1.90 to $1.94.  Credit Suisse, on the other hand, suspects earnings growth will be slower than anticipated and has an Underperform rating with a target price of $1.49, up from $1.36 prior to the results release.

Cover-More also reported solid half year results.  Macquarie has an Outperform rating with a $2.30 price target while UBS has a Buy rating, raising its price target from $2.25 to $2.30 following the results. Cover-More has been in business for 27 years and operates in Australia with an expanding presence in Asia. The company has roughly a 46% market share in the Australian travel insurance market.

At the other end of the spectrum we find the disappointing performance of ISelect Ltd (ISU), the operator of an Internet portal that allows consumers to compare a variety of car and health insurance products, utilities, and other financial service products.  While many Internet-related stocks come out blazing, ISU has so far produced a resounding thud.  Here’s the company’s share price performance since listing:

The company has hit numerous roadblocks, beginning with an ASIC enquiry concerning claims made in the IPO prospectus; its first full year reporting failed to meet guidance; the CEO resigned. Despite ISelect’s past troubles, Credit Suisse has a Buy recommendation following the 2014 Half Year results, which met guidance.  However, Credit Suisse lowered its price target from $1.90 to $1.70.

For more cautious investors, below are four big cap insurance stocks with market caps over $1 billion. 

Company

(CODE)

Market Cap

Share Price

(27 March)

52 Wk % Change

Dividend Yield

Forward P/E (FY 2015)

5 Year Expected P/EG

3 Year Total Shareholder Return

5 Year Total Shareholder Return

Suncorp Group (SUN)

 

$16.3b

 

$12.76

 

+12%

 

5.1%

 

12.15

 

0.38

 

21.5%

 

22.5%

QBE Insurance

(QBE)

 

$15.9b

 

$12.75

 

-11%

 

2.9%

 

11.59

 

0.76

 

-6.6%

 

-3.2%

Insurance Australia Group (IAG)

 

$11.8b

 

$5.51

 

-4%

 

6.9%

 

11.72

 

-8.08%

 

21.3%

 

14.6%

NIB Holdings Ltd

(NHF)

 

$1.25b

 

$2.83

 

+25%

 

3.6%

 

15.72

 

2.37

 

38.9%

 

39.8%

 

Suncorp Group Ltd (SUN) has banking operations as well as traditional insurance, making this stock the most diversified of the group. Dividends have increased every year for the past three, and analysts estimate dividend growth of 5.6% over the next two years.  Forward looking estimates such as the estimated P/EG and Forward P/E, both of which look good, are based on consensus opinion. Right now Thomson/First Call shows 3 analysts with Strong Buy recommendations; 7 with Buy recommendations; and 6 recommending investors Hold the stock.  

Suncorp gets most of its revenue from general insurance and the company was hit hard by natural disasters over the past few years.  Management is looking to expand its retail banking operations and general insurance and has shed non-core assets, like commercial loans.  Looking back to the 2012 Full Year Results – Non-Core operations were the exception that showed a loss.  The decision to focus on retail banking, general insurance, and life insurance dates back to 2009.  The share price suggests the decision has paid off.  Here is the chart:

QBE Insurance Group (QBE) has pulled back recently, shedding some 35% of its share value over the past five years.  Here is the chart:

While Suncorp operates only in Australia and New Zealand, QBE is global, offering general insurance and reinsurance throughout the Asia Pacific region, as well as Europe, and North and South America.  Management has embarked on a multi-point change program designed to better utilise the company’s core strengths.  On 26 February QBE reported Full Year 2013 results, showing a 7% drop in revenue and a 133% drop in NPAT.  While the Forward P/E and expected P/EG indicate better days ahead, assuming analysts are correct in their estimates, investors should take notice of the company’s 44% gearing and $4.6 billion in total debt.  

In contrast, Insurance Australia Group Ltd (IAG) has gearing at 26% with $1.7 billion in total debt, as of the most recent quarter.  IAG offers general insurance and related financial services in Australia, New Zealand, Thailand and Vietnam.  The company has sold off its troublesome UK business and the decision to focus on the Australia/New Zealand and Asia Pacific business appears to be paying off.  Full Year 2013 results showed a 6.6% increase in gross written premium and a 275% increase in NPAT.  The recently reported 2014 Half Year results noted a 15.6% increase in revenue and a 39.3% rise in NPAT.  The company has the highest dividend yield of any of the stocks in the table at 6.9%, fully franked.  The forward looking numbers will not reflect the potential of the acquisition of the Wesfarmers insurance operation until the deal is approved.  Over five years the share price is up 60%, with the rise beginning about the time the company began exiting the UK market.  Here is the chart:

Investors are wary of the Wesfarmers buyout, represented by the announcement of the proposed acquisition.  Here is a six month chart:

The final stock with a market cap over 1 billion is health insurance provider NIB Holdings (NHF).  In addition to private health insurance NIB offers life and travel insurance as well as related health care activities.  On 25 March the company announced new NIB Options services – cosmetic surgery and dental service.  The company recently released Half Year 2014 results, showing a respectable 20% increase in premium revenue and a 9.2% increase in NPAT.  Return on Equity (ROE) on a trailing twelve month basis (TTM) is 21.19%.  Analysts expect NIB’s earnings to rise approximately 23% for the full year 2014, due not only to rising health care premiums, but also to market share growth.

The company began trading on the ASX on 5 November 2007 with an issue price of $0.85.  The opening price on its first trading day was $1.14, falling to $0.81 at the close.  The rough times continued, but patient shareholders willing to weather the storm have been well rewarded as the stock started to advance in 2011 and is up over 120% since it came on the ASX.  Here is the chart:

Despite its smaller size, NIB Holdings has posted the highest average annualised shareholder return over 3 and 5 years of any stock in the table.  

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