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Forecast 2019: Insurance

David Ellis, CPA  |  14 Dec 2018Text size  Decrease  Increase  |  
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Key Themes for 2019

The outlook for the general insurers is positive with good underlying revenue and margin momentum expected to continue in 2019. The forecast earnings per share growth is underpinned by improved pricing, digitalisation, divestment of non-core divisions, investment earnings and capital returns. Increased reinsurance cover will limit net claims costs and improve risk dynamics. Offsetting the positives, higher natural peril costs threaten underwriting profits despite increased allowances.


Exhibit 1: Underlying insurance margins – trending higher in 2019-23

Exhibit 1: Underlying insurance margins – trending higher in 2019-23

Source: Company accounts, Morningstar forecasts
Note: QBE FY18 is forecast; IAG and SUN FY18 are actual


The focus on claims management simplification and productivity improvement will complement modest revenue growth. Modest premium price increases will provide earnings support in 2019 and 2020. QBE Insurance will benefit from a more focused global business model with domestic insurers leveraging improved business activity.

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The private health insurance sector continues to benefit from profitable business models, but political uncertainty, ongoing affordability issues and regulatory capital uncertainty will likely weigh on share prices. Like general insurers, the health insurers continue to improve operational efficiency, supporting modest earnings growth.

We foresee the general insurers maintaining strong capital positions due to robust profitability and increased reinsurance arrangements. Risks include: stiff competition from traditional and online rivals; weaker investment markets; deterioration in the Australian economy; weak economic conditions in the U.S. and Europe; an increase in the frequency and cost of natural hazards; and future potential softening in commercial insurance pricing.

Most/Least Preferred Stocks

The general insurers are undervalued with QBE Insurance most attractive. QBE continues the simplification and de-risking journey. The global business model continues to shrink with recently announced asset sales adding to the growing list. In addition to de-risking, simplification allows an operational efficiency program, with underlying fundamentals expected to improve during the next three years. We expect further good progress with legacy issues over the next year.

Suncorp and Insurance Australia Group are trading close to fair value. NIB Holdings and Medibank Private are undervalued trading around 20% below our valuations. In most cases, fully franked dividend yields between 3.0% and 5.8% grossing up to 4.3% to 8.1% are attractive.

In order of preference, we like QBE, Insurance Australia Group and Suncorp. Insurance broker Steadfast Group provides attractive earnings growth and is trading modestly below our fair value.

is a senior equity analyst in the equity research team at Morningstar.

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