\n\tBy Greg Peel<\/p>\n
\n\tInsurance companies collect premiums on policies and invest those proceeds in various financial markets. In simplified terms, an insurer's earnings are the net of returns on those investments and the payouts made on policies in the period (if we ignore reinsurance for the moment). Earnings thus come under threat at times when markets are volatile and weak and if investment portfolios are weighted towards underperforming assets. Presently we have the case of globally weak stock prices and globally strong (low yield) fixed interest prices.<\/p>\n
\n\tOn that basis, the analysts at Credit Suisse have updated their earnings forecasts for Australia's major listed insurers to allow for market movements in the September quarter. How those insurers subsequently fare is a reflection of investment portfolio allocations.<\/p>\n
\n\tInsurance Australia Group ((IAG<\/span>)) boasts $3.6bn<\/span> of shareholder funds of which 41% is invested in “growth” assets, Credit Suisse notes, split as 23.5% equities and 17.6% convertible bonds (equity hybrids). Clearly the current market weakness is impacting on IAG's<\/span> earnings, to the point the broker has downgraded its FY12<\/span> profit forecast by 29%. [IAG<\/span> runs June-end accounts.]<\/p>\n \n\tThe good news is CS has made only minimal changes to forecasts beyond FY12<\/span>, and indeed its second half FY12<\/span> forecast profit has been reduced by only 1% while its first half is down 66%. This would tend to imply the analysts see an end to current market volatility by next calendar year. The bad news for shareholders is the analysts have also cut their first half dividend expectation by 60% to 3cps<\/span>.<\/p>\n \n\tOn a similar basis, CS sees downside risk to the QBE<\/span> Insurance ((QBE<\/span>)) dividend, although the broker has not yet cut its forecast. Given weather claims in the second half of 2011 have been minimal, QBE<\/span> may be able to maintain a flat dividend or at least keep any reduction to a minimum, the analysts suggest. [QBE<\/span> runs December-end accounts.]<\/p>\n \n\tCS has nevertheless downgraded forecast 2011 profit by 14%, with its second half forecast falling 26%. Outer year changes are minimal. At that level, flat dividend forecasts imply a 100% payout ratio over 2011 and 115% for the final distribution. Hence the downside risk to QBE<\/span> dividends.<\/p>\n \n\tIn contrast to its peers, Suncorp-Metway's<\/span> ((SUN)) investment portfolio is far more conservative, the broker notes, given its general insurance funds are all in fixed interest and equity exposure for the life business is less than 10%. The result is that Suncorp<\/span> actually scores an earnings upgrade in FY11<\/span> from CS, albeit only a mere 1.4%. This is matched by slight earnings decreases in latter years. [June-end accounting.]<\/p>\n \n\tThe problem for AMP ((AMP)) is compounded by weak investment inflows on top of weak market returns, the broker notes. CS has downgraded forecast profit by around 4% in both 2011 and 2012. [December-end accounting.]<\/p>\n \n\tThe good news is that AMP is carrying some downside protection for its capital position, but operational earnings are clearly going to be affected by weak equity markets, the broker suggests, and the longer the market remains volatile the more likely funds flow will also remain weak.<\/p>\n \n\tDespite Credit Suisse's cuts to profit and dividend forecasts, the analysts have changed neither their target prices for the insurers nor their ratings. IAG<\/span> and QBE<\/span> thus both retain Neutral ratings from CS on target prices of $3.60 and $13.50 respectively while Suncorp<\/span> and AMP retain Outperform on targets of $9.50 and $5.00.<\/p>\n \n\tAssigning values to the Buy, Hold and Sell ratings of each of the eight brokers in the FNArena<\/span> database for each of the four stocks provides a sentiment indicator (range of plus one to minus one) for IAG<\/span> of 0.3, for QBE<\/span> of 0.5, for Suncorp<\/span> of 0.9 and for AMP of 0.8. Please refer to FNArena's<\/span> Stock Analysis for more detailed information.
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