JCoure: PWC has taken a well-deserved pounding, yet for a...

JCoure: PWC has taken a well-deserved pounding, yet for a company like QBE, crawling with financially-anal actuaries, I dont see choice of auditor as an issue.

Today's AFR:

Fund managers have been buying up insurers over the big four banks to protect against an economic slowdown because customers will accept having to pay higher premiums – and they are finally starting to make money on their investments.

Companies such as ASX-listed insurers QBE and Insurance Australia Group, which were the unlikely winners of the latest reporting season, are chief among their top picks, with the former pushing through premium rate rises of as much as 12 per cent in the first half of the fiscal year to counter rising inflation pressures. In a high-inflation cycle, not all listed companies have been able to pass through price increases, so investors have been ascribing a higher premium to those that can. IAG, for example, last month moved from a ‘‘neutral’’ rating to being ‘‘well held’’, according to JPMorgan’s fund manager radar.

Ophir Asset Management’s head of research, Luke McMillan, is betting on insurance broker network AUB Group and private health insurer NIB Holdings to shore up the portfolio against a slowdown in the economy that he said remained a risk.

That is because insurers ‘‘typically do quite well’’ in a slower economic growth environment or even a recession, as they did during the global financial crisis.

‘‘They’re one of the last things that individuals or businesses typically want to cut during an economic downturn – they’re really essential services,’’ Mr McMillan said, adding that it was a ‘‘line ball call’’ on whether the US, the world’s largest economy, was headed for a recession.‘‘The types of companies that we’re looking for are those that are less reliant on strong macroeconomic growth at the moment because there are big risks around that in the short term,’’ Mr McMillan said.

UBS’s equity strategist in Australia, Richard Schellbach, also noted in a report to clients that the investment giant’s portfolio was ‘‘defensively skewed’’ and had a ‘‘preference for stocks with income, and or non-cyclical growth channels’’.

‘‘The insurance sectors still satisfies both,’’ Mr Schellbach wrote, ‘‘as a premium hardening cycle in an environment of strong pricing power enables earnings to grow in tandem with attractive dividend yields.’’

Echoing Ophir’s stock picks, AUB Group and QBE Insurance are on UBS’s list of most preferred stocks. In the same note, the strategist wrote that RBA’s rate increase ‘‘plus the possibility of another in February’’ would test the Australian economy, which had ‘‘so far detached itself from the rate-hiking cycle’’.

Paradice Investment Management also favours insurers over the banks, and holds IAG, QBE and Medibank in its Australian equities fund. Portfolio manager Julia Weng said that the companies were reporting double-digit topline growth, an improvement in insurance margins, and enjoying the benefit of higher interest rates on the income from their investment portfolios.

‘‘While affordability is front of mind, insurance is mostly [viewed] as a nondiscretionary spend, so consumers have responded by trimming expenditure in other areas,’’ she said. ‘‘Households can shop around, but higher premiums are an industry-wide trend.’’

‘‘Another tailwind across the insurers is the benefit of higher interest rates, which the insurers earn on the premiums received, [which has been] a significant boost to the bottom line and capital position.’’ Ms Weng added that the banking sector lacked topline growth and housing growth remained subdued at around 4 per cent.

Banks were having to fight for mortgages and deposits and net interest margins were still declining, as evidenced by Westpac’s result this week.Even so, the Sydney-based money manager still owns ANZ and National Australia Bank.

Airlie Funds Management also likes insurers, and owns QBE in its Australian share fund, which holds anywhere between just 15 and 35 stocks. It, too, is underweight banks.‘‘Insurers for the past two to three years haven’t earned a great return on their investment portfolios because interest rates have been quite low,’’ said Airlie analyst Joe Wright. ‘‘But now that they’ve come up, that should drive good earnings growth.‘‘We think QBE is trading on less than nine times price to earnings, which puts it a few multiple turns cheaper than most banks. And a lot cheaper than Commonwealth Bank.’’

__________________________________

Ash here.

Exactly so. Insurance was in the dog-house two years ago. Higher interest rates and solid premium increases have transformed their margins and cash flows.

QBE is well-capitalised after a very painful cap raise at the bottom of the market. Its bond ladder is now producing real returns and with positive rates can play to its strength in maturities and risk. It can genuinely consider off-shore M&A's.

Yes, insurance is a dull business, but I'd rather own QBE than banks.

Ash