Analysts are stepping up the upbeat rhetoric on the listed general insurers with fierce debate over whether Insurance Australia Group or Suncorp Group delivers the most value, intensifying.
Citi’s Nigel Pittaway has declared Suncorp the victor overall - primarily becasue it trades at such a huge discount to IAG - but also because Suncorp Bank will reap massive benefits from recent industry turmoil.
In an in-depth, head-to-head report, the Citi analyst compared the two companies across ten categories including: leverage to the upturn in Australian commercial pricing; positioning in profitable domestic home and motor; exposure to weather events; scope for capital return, valuation and overall earnings growth.
Not surprisingly, IAG won the fight by six to four. Still, Suncorp was ahead of its rival on valuation, greater share of gross written premium from personal lines and on capital returns given any success in selling or reinsuring its Life business.
Interestingly, Suncorp also emerged as the clear winner in a category that compared IAG’s Asian business with Suncorp’s banking business.
A sweet spot
“In our view, the Bank is the more attractive of the two exposures particularly in the short to medium term with still some lingering question marks over precisely what IAG’s strategy is for its remaining Asian businesses and what it will gain from potentially increasing its stake in its Malaysian and Thai businesses," Pittaway said.
“Suncorp Bank seems to be in something of a sweet spot, with an enhanced competitive position, as it escapes the levy on the major banks but seems likely to benefit from any associated repricing, while it also escapes the credit rating downgrades that smaller standalone banks suffered.”
While APRA is requiring more capital by 2020 the analyst thinks this seems relatively modest and entirely manageable.
In the shorter term, the Bank’s net interest margins are likely to improve due to regulatory-driven sector repricing, particularly in investor lending.
Although benefits to Suncorp here are limited - given only 30 per cent of home lending is to investors - the imposition of the levy on major banks may lead to broader sector-wide repricing.
“Given Suncorp Bank is exempt from the levy and will hence see its competitive position improve, this may help lift its market share in home loans, helping to improve soft book growth of only 0.4 per cent in the March quarter. This was below system, and we believe the subdued rates of growth are likely to have continued in the June 2017 quarter.”
However, the quality of the book remains solid and looking ahead the analyst expects returns to improve from margin growth and a reduction in costs.
When it comes to IAG's Asian exposure, Pittaway noted that to date, the division has struggled to make a mark, with its performance being more than a footnote in overall Group results.
Over the last 11 years, he said IAG's Asian businesses have never contributed more than 1 per cent to Group insurance profit while on two occasions they were a 7 per cent drag.
“We note, however, that IAG seems recently to have been exercising a renewed discipline around its Asian growth strategy. Nonetheless, in our view IAG’s Asian strategy remains uncertain and it is unclear to us that this will be fixed by any stake increases in Malaysia and Thailand which appears to be IAG’s current intention, although there is the potential for market structure in the countries to improve.”
That said, Citi expects the Queensland-based insurer to achieve core profit growth of 9 per cent per year over the two years to 2020 as cost-out benefits flow through to an improved expense ratio. This compares to only 2.7 per cent annual growth for Suncorp’s general insurance business – although that is ex the Bank over the same period.