Financial Services

The sector poised for a multi-year breakout, backed by strong earnings and loved by analysts

Tue 06 Feb 24, 12:50pm (AEDT)
Suncorp SUN insurance
Source: Shutterstock

Key Points

  • Major insurers like Suncorp, IAG, and QBE are pushing towards multi-year highs, buoyed by analysts' optimism and favorable industry trends
  • Morgan Stanley highlights Suncorp and IAG as "best stocks" for early 2024 due to pricing power and short-term earnings potential
  • QBE recently emerged as Morgan Stanley's top pick for a potential re-rating and capital management options

Insurance – It's not the most exciting sector and slow-moving insurance stocks have the tendency to trade sideways like no tomorrow.

But its not often that you see a list of major insurers like Suncorp (ASX: SUN), Insurance Australia (ASX: IAG) and QBE Insurance (ASX: QBE) setting up for a breakout to multi-year highs.

As US trader Mark Minervini once said, "when you see a growing number of names in a particular industry making new 52-week highs, this could be an indication that a group advance is underway.”

The sector is also loved by analysts, with Morgan Stanley calling names like Suncorp and IAG the "best stocks to own in early 2024, given personal lines pricing power and an option to over-earn in the short term."

Moving out to multi-year highs

Suncorp has been range bound between the $13.30 to $14.20 level for around six months and trying to push recent highs. A move above $14.20 would mark a near six year high.

SUN
Suncorp weekly chart (Source: TradingView)

Insurance Australia has also been relatively range bound since June last year, trading between $5.50 and $6.10. It's struggled to break above $6.10 in early August 2023 as well as December 2023. Third time lucky?

IAG
Insurance Australia Group weekly chart (Source: TradingView)

QBE has the most volatile chart among the three insurance stocks we've listed. On 17 February 2023, the stock rallied 7.4% to a two-year high after reporting better-than-expected 1H23 results. It's been largely range bound ever since. But briefly managed to tag an almost 11-year high on Monday.

QBE
QBE Insurance weekly chart (Source: TradingView)

Morgan Stanley's take

"We think the relative positive EPS growth and the attractiveness of the insurers and the brokers will continue in early to mid-2024," Morgan Stanley analysts said in a note dated 17 January 2024.

"Suncorp and Insurance Australia are the best pure-play names to own, given personal lines pricing power and a favourable backdrop with the option to over-earn in the short term."

The second half of FY24 was flagged as a "more balanced proposition" as price increases begin to slow and earnings growth in other sectors begin to pick up, which weighs on the relative attractiveness of insurers.

"We expect pricing to slow in CY24, given increasing affordability pressures – Consumers will not accept 15-25% price rises on insurance (several times above wage growth) for much longer," the analysts said.

Two weeks later, Morgan Stanley said the optionality for QBE to boost earnings, remediate North America and manage capital makes it "our top pick, replacing Suncorp."

"We think QBE can re-rate; our $20 price target (raised by 10%) offers more than 25% upside," the analysts said in a note dated 31 January 2024.

The key catalysts include:

  • North American turnaround should beat consensus expectations: The analysts noted an improvement among US commercial peers. "We upgrade our North American underwriting profit by 2x to US$260 million for FY25," the analysts noted.

  • Capital management options: "QBE is heading into surplus capital territory for the first time in a decade. The company could increase its payout from 50% but with 10% franking, we think QBE should consider buybacks," the analysts said. QBE is forecast to have approximately US$320 million of excess capital at the end of FY23, growing to US$530 million by FY24.

Bond yield resurgence

Bond yields are also staging a bit of a comeback as Fed policymakers push back against the market's aggressive rate cut expectations. The market is currently pricing in just over 105 bp of rate cuts in 2024, down from 140 bps last week and 175 bps earlier in January.

The US 10-year bond yield is up 27 bps in the last two sessions to 4.16%.

More broadly speaking, rising bond yields tend to act as a tailwind for insurance stocks. The companies hold substantial portfolios of fixed-income securities, primarily long-term bonds. When yields rise, the income generated from these investments increases, generating higher returns.

QBE vs yields
QBE (blue) vs. US 10-year yield (red) 12-month comparison (Source: TradingView)

The Australian 10-year bond yield is also up 21 bps in the last three sessions to 4.14%.

Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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