Tag: Australian Market
Business Strategy & Outlook
QBE Insurance is an international property and casualty insurance company with around USD 20 billion of annual gross written premiums. It writes about 25% of its annual premiums in its home region of Australia and New Zealand, which accounts for more than half of the groups underwriting profit. Other key markets include North America, Europe, and Asia Pacific. QBE is predominantly focused on specialty insurance lines, but the offering is extremely wide ranging across property, auto insurance, agriculture, public/product liability, professional indemnity, workers compensation, marine, energy and aviation, and accident and health. The size and diversity of insurance is built on the back of hundreds of acquisitions made over decades. The extended period of global growth via acquisition failed to deliver the cost-synergies or scale benefits management had hoped. The strategy has rightfully shifted, and progress is being made in turning the business around. The balance sheet has been strengthened and operational efficiency improving. The way senior management has reshaped insurance portfolios, cut costs, tightened underwriting standards and increased accountability across the group looks impressive. In addition to divesting several businesses, a greater focus on returns has led to group wide improvement in attritional claims.
While reducing premiums, decisions to reduce exposure to certain areas–for example, large commercial properties, and properties in higher risk areas–has improved profitability and reduced volatility. The performance of investment markets brings another element of volatility to earnings. QBE manages a sizable investment portfolio of about USD 27 billion as of June 30, 2022, being both policyholder and shareholder funds. Around 90% is held in cash and fixed-interest investments, with the remainder spread across equities and alternatives. Consequently, the group’s profitability is at risk from changes in interest rates, credit spreads, and– to a lesser extent–equity market. The returns are to remain suppressed in the short-term but will gradually recover as global cash rates normalize.
Financial Strengths
QBE Insurance is in sound financial health. After a multi decade strategy of growth by acquisition, a much-needed period of consolidation has included the exit from Latin America, North American personal lines, a number of Asian markets where the group lacks scale, and underwriting agencies and travel insurance in Australia and New Zealand. QBE Insurance held USD 3 billion in gross debt with a debt/equity ratio of 32.4% at June 30, 2022. Debt/total capital of 24.5% is within management’s 15%-30% target. QBE’s prescribed capital amount, or PCA, multiple is 1.77 times, at the top of the group’s 1.6-1.8 times target range.
Bulls Say
- Rising insurance premiums, underwriting discipline, productivity initiatives, and focus on profitable growth, to drive consistent excess returns.
- The U.S. operations have significant upside potential. It is expected that years of disappointment to eventually lead to premium rates reflective of the underlying insured risks.
- The strong balance sheet and positive premium pricing supporting dividend growth and the return of surplus capital to shareholders.
Company Description
QBE Insurance is an international property and casualty insurance company. It writes about 25% of its annual gross written premiums in its home region of Australia and New Zealand, which accounts for more than half of the group’s underwriting profit. Other key regions include North America and Europe. QBE Insurance offers a number of personal, commercial, and specialty lines, including property, auto insurance, agriculture, public/product liability, professional indemnity, workers compensation, marine, energy and aviation, and accident and health.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
Business Strategy & Outlook
Costa’s strong earnings growth to continue over the near term as expansionary investment in farms both domestically and in the firm’s China and Morocco businesses begins to bear fruit. However, Costa’s customer base is highly concentrated, and its products highly commoditized, and the company has carved an economic moat required to sustainably derive economic profits. Despite the potential for short-term fluctuations, which are inherent in an industry exposed to changes in weather and climate, the Australian fruit and vegetable industry has enjoyed a consistent trajectory, growing its value at an average of 3.4% per year over the past decade. Similar industry growth over the next decade is expected, underpinned by population growth, inflationary price increases, and some per capita increases in fruit and vegetable consumption.
It is expected expect Costa can outpace industry growth and capture market share, at least in the near term. Costa is growing its Australian market share to around 20% over the next five years, from 15% currently. However, this comes at a cost. With current projects such as the Monarto facility expansion increasing its footprint in mushrooms and ongoing berry expansion, Costa’s growth activities are capital intensive. The firm’s capital expenditure has expanded from around 5% of sales in 2016 to 11% in 2021, and the remaining is in the high single digits in the near term as the firm continues to ramp up growth with new projects. Costa’s International segment operates farms in Morocco and China, and earns royalty income from licensing its blueberry genetics. The Morocco operation is principally an export business, supplying blueberries to the U.K. and continental Europe, while China berry farming sales remain predominantly local. A significant growth is expected in the international segment over the short term as Costa continues to ramp up its international facilities. While labor costs are lower in these regions, without the biosecurity regulations of Australia, international farming is more exposed to import competition.
Financial Strengths
Costa’s balance sheet is in good shape. Net debt/EBITDA lifted to 1.8 in calendar 2021 as elevated capital expenditure, including the AUD 237 million 2PH Farms acquisition, was partially offset by the AUD 185 million equity raise. Costa’s AUD 176 million equity raising in calendar 2019 has placed the firm in a much more conservative position–suitable for a firm needing to ride out short-term fluctuations, which are inherent in an industry exposed to changes in weather and climate. Costa’s fiscal 2019 net debt/EBITDA would have ballooned to over 3.6 without the raising. This is much higher than the firm’s target range of 1.5-2.0, and would breach the estimate of the firm’s covenants, it is expected to be in the vicinity of 3.5. Costa’s balance sheet is well placed to underpin a dividend payout ratio of around 60% of underlying earnings per share. Conservative management of the balance sheet is also prudent considering the capital requirements ahead of the firm. With current projects such as the Monarto facility expansion increasing its footprint in mushrooms, investment in the Guyra tomato glasshouse, continued berry expansion, and ongoing international expenditure, Costa’s growth activities are capital intensive. The firm’s growth capital expenditure has expanded from around AUD 30 million in 2016 to AUD 128 million in 2021. While growth expenditure dipped to AUD 50 million in calendar 2020 as the firm tightened growth expenditure amid COVID-19 uncertainty, this expanded to more elevated levels around AUD 80 million in calendar 2021, not including acquisitions. A near-term growth capital expenditure of above AUD 60 million as the firm continues to ramp up expansionary projects.
Bulls Say
- Costa’s strong market share in key categories mitigates its high customer concentration risk
- International berry expansion to China is running according to Costa’s original five-year plan, and appears set for significant growth.
- Costa is well positioned to capitalize on high growth in emergent product categories, such as blackberries.
Company Description
Costa Group is the largest fresh produce company in Australia, with an estimated market share of over 15%, principally supplying fresh fruit and vegetables to the major Australian supermarkets. While supplemented by third-party growers, the firm’s products are predominantly sourced from around 5,000 planted hectares of farmland, 30 hectares of tomato glasshouse facilities, and mushroom-growing facilities across Australia. Costa also operates berry farms in Morocco and China as part of its international business.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
Business Strategy & Outlook
Insurance Australia Group is a general insurer with around AUD 13.5 billion of annual gross written premiums, operating in Australia and New Zealand. Insurance Australia Group is a custodian of well-known heritage brands which include NRMA, CGU, SGIO, SGIC, Swann Insurance in Australia; and State, NZI, AMI, Lumley in New Zealand. Some brands are specific to certain states, but at a group level the insurer carries concentrated weather and earthquake risk in Australia and New Zealand. General insurance in Australia and New Zealand is mature, with limited organic growth opportunities. The group’s strategy is focused on enhancing the digital offering to ensure simpler and faster quotes, claim processing, and to ensure the large insurer remains competitive on price. In response to changes in the way customers engage with their insurer, productivity improvements remain a key priority. Competition across both the direct-to-consumer and the broker channels is intense. A number of large global insurers are increasingly targeting the broker channel, such as AIG, Zurich, and Chubb. Others have meanwhile leveraged already established brands by offering white labeled products, or gone direct to market with their own low-cost offering.
Large insured events occur without warning, and Insurance Australia Group lacks meaningful geographic diversification outside of Australia and New Zealand. Reinsurance protection mitigates risks to some extent, but can be expensive, particularly following large events. The performance of investment markets brings another element of volatility to earnings. Insurance Australia Group manages a sizable investment portfolio of about AUD 12 billion, being both policyholder and shareholder funds. The majority is held in cash and fixed-interest investments, with the remainder spread across equities and alternatives. Consequently, the group’s profitability is at risk from changes in interest rates, credit spreads, and– to a lesser extent–equity markets.
Financial Strengths
Insurance Australia Group remains in good financial health following an equity raising in November 2020. As of June 30, 2022, the company had gross debt and hybrids of about AUD 2.0 billion, representing a gearing ratio (debt and hybrids/tangible capital) of 40%, within its 30%-40% target range. As of June 30, 2022, IAG’s prescribed capital amount multiple was 1.8 times, the top-end of the group’s long-term benchmark of 1.6-1.8 times. The common equity Tier 1 multiple was 0.97 times, within the target range of 0.9-1.1 times and well above the regulatory minimum of 0.6 times. After an additional release of business interruption provisions and AUD 350 million share buyback, the common equity Tier 1 multiple is closer to 1 time. Insurance Australia Group issued Berkshire Hathaway with 90 million new shares at AUD 5.57 per share in June 2015, which gives Berkshire a 3.7% position in the group. Berkshire is limited to a maximum holding in Insurance Australia Group of 14.9% and must at least maintain its initial 3.7% stake during the term of the 10-year quota share.
Bulls Say
- The firm’s underwriting discipline, productivity initiatives, and focus on profitable growth will see returns consistently return its cost of capital.
- IAG has collectively removed downside risk from 32.5% of its business while retaining exposure to earnings upside via profit share arrangements
- A benign claims environment with a lower incidence of major catastrophes considerably boost underwriting profits.
Company Description
Insurance Australia Group is the largest domestic general insurer by gross written premium operating in Australia and New Zealand. The key general insurance markets in which IAG operates are home and contents, motor vehicle and compulsory third-party, and short-tail commercial. IAG sells insurance under several brands, including NRMA, CGU, SGIO, SGIC, WFI, and Swann in Australia, and NZI, State, AMI, and Lumley in New Zealand.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
