Insurance Looking Interesting Again
UBS | Jul 21, 2017 15:30
Originally published by UBS Asset Management
Having largely exited our domestic general insurance exposures in 2014, as the premium cycle peaked, we began to build a significant position in IAG (AX:IAG) earlier this year, following a period of underperformance. Industry feedback gave us confidence that price increases were becoming more broad based and were sticking. These ongoing price increases were not yet reflected in earnings or valuations as the price increases take time to flow through the entire customer base and be earned over the life of a policy.
Price increases were initially driven both by a reaction to insurers under earning on certain classes of business but also rising claims cost pressures. These costs are typically reflected sooner in earnings and assumptions, which pressures margins, before pricing catches up and margins recover. This is the point we appear to be at now, with short term earnings having been under some pressure and the stock trading on a high multiple of bottom of the cycle earnings, but less focus on the future improvement coming from pricing and costs. With industry feedback typically indicating mid-single digit price increases and IAG also undertaking a significant cost out program to close the gap with peer Suncorp (AX:SUN), we see both company specific and broader industry factors lifting IAG's margins in the medium term. Additionally, general insurers, given their large bond portfolios, will eventually benefit from a normalisation of interest rates.
In what appears to be a difficult economic environment, very few companies seem to offer the combination of revenue growth and margin expansion opportunities available to IAG as well benefiting from a normalised level of interest rates.
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