Contents
When the Generals talk 3
An improving rate cycle should provide protection against declining bond yields, a
deteriorating economy and lower reserve releases. Reasonable visibility on
earnings and low PEs make SUN and QBE attractive, in our view.
3
The rate cycle – by and large a hardening market 3
Industry trends 7
Domestically, the retail insurance market continues to harden and rising underlying
margins should benefit IAG and SUN over the next couple of years. For QBE,
global commercial rates are slowly starting to harden, but lower short-term yields
are a concern.
7
The rate cycle 7
Investment yields 12
Exchange rates 16
Improving underlying domestic margins 17
Economic deterioration 18
Reserve releases/claims provisioning 21
Reinsurance arrangements 24
Deterioration in the weather 25
Company dynamics 28
We upgrade SUN to Buy, believing it to be undervalued even if banking ops are
retained. QBE remains inexpensive on PE, with an excellent record in earnings
growth, and we stay at Buy. We retain our Hold call on IAG, believing it fairly priced
for the likely turnaround.
28
IAG (Hold, TP A$3.53) 28
QBE (Buy TP A$24.64) 32
SUN (Buy, TP A$7.35) 36
Appendices 48
1. Rates commentary from US insurers in 1Q09 48
2. Valuation methodology 48