Macquarie wrote that the market is valuing IAG Australia and New Zealand operations at a 2.5% discount to Suncorp’s property & casualty business but Macquarie “continues to prefer IAG’s P&C business to SUN, and appears to be mispriced at a 2.5% discount”.
It suggest that IAG’s domestic P&C operations should trade at a modest premium to SUN’s P&C business due to lower catastrophe risk profile given the geographic mix; the $100m peril protection; and IAG’s “ more established reinsurance programme with better protection”.
Macquarie analysts Tim Lawson and Bryan Raymond stated in an analyst notes: “Our preference for IAG vs. SUN remains given the level of reinsurance protection, zero exposure to life insurance and discounted P&C valuation. This is despite our expectation that IAG will continue to invest in markets in Asia that overall do not return the cost of equity of the group and SUN will pay a FY14 special dividend of 15cps.”
Macquarie looked at IAG’s reserving adequacy as a key driver of profitability. It found that reserve releases contributed 28.3% to insurance profit. It estimates that IAG has $161m of excess reserve redundancy for FY14 across long tail and short tail classes.
However, Macquarie said both IAG and Suncorp face increased pressure from new brands via supermarkets, online competition and comparison sites.
“This competition, as well as affordability, will cause IAG (and SUN) to manage volume ad margins more acutely than in previous years”, the analysts added.