QBE Insurance (QBE) Suncorp (SUN) have both lost ground against the smaller insurers on the ASX.
In fact, SUN and QBE are down over the last year (-13%, and -28%), while the smaller insurers AUB Group (AUB, formerly ‘Austbrokers’) is up 11%, Steadfast (SDF) +17% and NIB Holdings (NHF) +23%. See the chart below for the price movements over the last year.
Before we jump to the Brexit excuse, no, the trend was set in place well-before the Brexit vote was announced, so what is making the smaller companies push above their larger peers?
From an over-arching banner, we learnt that last financial year (FY) the larger companies underperformed the smaller companies, but that’s not the whole story for the insurers ( here is an interview with Will Canty at Boardroom.Media that looks at this FY movement in a little more detail.)
Large Insurers headwinds
“From a broad perspective, the larger insurers have suffered from low-growth in premiums, the delayed impact of the premium cycle and lower investment earnings.” Say Alex Shevelev, Portfolio Manager at Glennon Capital (GC1). Shevelev adds that for the larger insurers “Natural events remain a risk”.
What have the smaller insures done to push higher?
The stronger performance for each of these companies has been helped by a combination of acquisitions, cost-cutting and the ability to extend out their earnings margins.
Steadfast – making hay while the sun shines
As the industry is watching premiums fall, this has impacted most company’s overall profit, however SDF has bucked the trend.
“Steadfast have been effective at offsetting price falls with volume increases.” Says Shevelev. And continues “This paired with cost control is actually delivering small growth against the premium fall headwind.”
Looking at how SDF have out-performed the market so far Shevelev says “Bedding down acquisitions and some synergies mean earnings per share (‘EPS’) will grow 10%+ this year”. Although looking further out he cautions “EPS growth will be more difficult going forward.”
AUB Group – pushing higher despite industry headwinds:
“AUB has been able to control costs well and been able to grow the non-broking businesses” says Shevelev.
Although the headwinds impacting the larger insurers have impacted AUB Group because “As a distributor, the premium rate cycle is important and this provides a headwind to the business. A flat half, last half, was actually positively impacted by acquisitions.” Explains Shevelev.
Whiles AUB has faced headwinds like the larger peers, the cost-cuttings have helps the share price higher. When we look to see what the landscape ahead holds for AUB Shevelev explains “the premium cycle has been a negative (a decline of 6% for the first half), though this has shown signs of improving recently.”
NIB Holdings – Maybe overstepped their mark
In April this year NHF announced an earnings upgrade which led to a flurry of broker upgrades coupled with a +10% rally on the day, from around $3.80.
The rally that followed took the share price +20% higher over the next two weeks, which surpassed Deutshe Banks price target (‘PT’) of $4 very quickly, Macquarie’s PT of $4.40 and Goldman Sachs’ PT of $4.50 to reach highs of over $4.80. Which leaves investors wondering has it gone too far?
Shevelev notes that “NHF has also rerated sharply over the past few years”, and that in recent times NHF “has performed strongly given the earnings upgrade”, but cautions “however it is earning margins above target rates this year so a margin unwind is likely going forward.”
Summary
While the industry is facing headwinds with the current premium-cycle the group remains doubtful. Plus, the larger end of the group has exposures to UK and EU unclear markets, looking at reduced growth which is not boding well for them.
However, as the last FY taught us, the smaller companies on the ASX actually gained, and some strongly (micro caps +25% last FY) against the over-all market falling. We are in the middle of a re-rating from the larger end to the smaller end as these three smaller insurance companies have – rightly or wrongly – been riding that wave, and until that market trend falters, it is providing an industry-agnostic tailwind to the small end of town.
Watch our latest video market update to see which sectors are leading the market now.
Note – Alex Shevelev has been holding and trading in AUB, SDF and NHF as Portfolio Manager at Glennon Capital (GC1).
