no loving + solid foundation = good buying

No guarantees but outlook brighter Martin Roth
November 10, 2010


The insurance business is inherently volatile and the profits and share prices of listed insurance companies can be equally so.

In the words of one analyst, who asked not to be named: ''Companies like Insurance Australia Group (IAG) and Suncorp-Metway always seem to be just one hailstorm away from a profit warning. That is a constant theme for them.''

Certainly, the recent performance of most insurance company shares has been far from impressive.

Advertisement: Story continues below Yet, thanks to a series of floats and demutualisations, insurance stocks remain relatively widely held by smaller retail investors despite a modest number of listed insurers.

For sharemarket purposes, the insurance industry can be divided into two broad segments. First the general insurers, represented by QBE Insurance Group, IAG (formerly NRMA) and Suncorp-Metway, which includes the AAMI and GIO brands and is also a bank.

Then there are the large life insurers, AMP and AXA Asia Pacific Holdings.

The general insurers make money from writing insurance policies and from investing the large sums that they hold. Their financial results are strongly geared towards levels of economic activity and the state of financial markets.

QBE has for many years been regarded as the star among Australian general insurance companies and the stock is widely held by institutional investors. Through a long series of acquisitions, it has expanded globally to become one of the world's 25 largest insurance companies, with activities in about 50 countries and about three-quarters of its income coming from overseas.

A director of Joseph Palmer & Sons, Alex Moffatt, says his company likes QBE ''because it is leveraged to economic recovery''.

''We like the management and we like the nature of their business,'' he says. ''It is good value.''

The research director at The Intelligent Investor newsletter, Greg Hoffman, notes that QBE is facing difficulties from its heavy exposure to the weak economies of the US and Britain. In addition, with so much of its income now derived from its overseas businesses, it experiences additional pain from the strength of the dollar.

''QBE is really facing some headwinds,'' Hoffman says. ''But we think that offers an opportunity. You buy the good stocks when they are going through troubles and QBE is a particularly good company.''



Thought this view may cheers some of you folks up who have been down on your luck lately. This is a good buying opportunity - dont panic!

SLE