SUN 1.51% $11.06 suncorp group limited

IAG, QBE - who is next ? SUN perhaps.

  1. 635 Posts.
    Just like many managed funds are having a hard time making good returns in a down market the same goes for insurance companies.
    Return on investments of 'idle' capital are poor and this in turn can have a major impact on the annual profit results. This was the case in the last SUN report.
    Interesting reading fro today's SHM attached.
    Is SUN the next to be hit ??
    Comments and informed opinions please.

    By Anthony Hughes
    June 19 2002

    The listed general insurance sector was under pressure on two fronts yesterday. One broking firm sharply lowered net profit expectations for Insurance Australia Group, and it was another topsy-turvy day for QBE Insurance's increasingly jittery investors.

    Merrill Lynch downgraded IAG, as it had QBE last week, citing the "marking-to-market" of investments held by the insurer to cover claims and earn returns on shareholders' funds.

    While some brokers were expecting IAG to earn $150 million to $200 million in the year to June 30, Merrill slashed its net profit forecast by 76 per cent from $181 million to $43 million.

    Investors in insurance companies generally look beyond headline profits to underlying insurance profits, given the bottom line is highly volatile because of the vagaries of investment markets.

    Nonetheless, the weak forecast bottom line, which would be below the interim result of $49 million, illustrates IAG's perceived inability to match the lofty forecasts contained in its 2000 prospectus.

    Every 1 per cent fall in the All Ordinaries results in a $30 million fall in IAG's profits; the Australian sharemarket is down about 3 per cent in 2000.

    The lower profit outlook is a little surprising given IAG said at the interim result that it was seeking to lower the volatility of returns by reducing the proportion of equity investments in its insurance reserves. But IAG has not telegraphed the timetable for the selldown of its share portfolio.

    Merrill still values IAG at $3.50, saying it was "more comfortable than ever in the strategic direction of IAG and its capacity to leverage structural benefits and opportunities that have emerged in Australia".

    QBE slid sharply in the morning to as low as $6.05 but recovered to finish 21c higher at $6.76 after the company finally put to rest speculation that some profit and revenue targets would not be met.

    Analysts said there was little new in the announcement but QBE clearly seems to be offside with some institutional investors, given the heavy trading volumes of recent days.

    The early jitters may also have been linked to Standard & Poor's decision to place an A-rating on the holding company, a rating two notches below its operating subsidiaries.

    Insurance companies are extra sensitive to rating changes because insurance brokers will not sell the policies of insurers with poor credit ratings.

    But S&P's Michael Vine said the lower parent rating relative to its subsidiaries was similar to the situation of other insurers such as Tower and AMP.

    Mr Vine said there might have been a misunderstanding but the new rating did not represent a downgrade.

    QBE said it was on track to deliver a projected insurance profit of 6-6.5 per cent of net earned premium of $5.5 billion, and claims experience was lower than expected.

    Overall premium rate increases were higher than the average 20 per cent increases earlier predicted.

    Chief executive Frank O'Halloran said the Lloyd's underwriting division was performing strongly.
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