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Time to take cover? Outlook for insurance stocks

Photo of Michael Gable By Michael Gable

min read

What the share-price charts say about QBE, IAG, AMP and Medibank Private.

Insurance stocks have provided Australian investors with plenty of joy and frustration over the years. From the devastation after 9/11, the likes of QBE Insurance and IAG eventually recovered and went on to post remarkable share price gains.

After the GFC, IAG again managed to claw back most of the losses but the performance of QBE has been disappointing. During this time, AMP has fallen and recovered but is still well under the prices seen at the time of demutualisation.

The listing of Medibank Private on ASX has seen most shareholders achieve some early profits and IAG’s strategic partnership with Warren Buffet has further put the focus back on insurance stocks.

Insurance stocks, by their nature, have volatile earnings because natural disasters and other claims can strike at any time. As a result, I have been wary of recommending them to my clients, but do any of their charts suggest a buying opportunity?

My most successful investment recommendations occur when we have a situation of positive company fundamentals matching up with positive technical signals. My philosophy is that we need to employ both techniques, not just one in isolation, and this has proven to be crucial in picking winners.

It is interesting to note that with the four largest insurance stocks, QBE, IAG, AMP and Medibank Private, the fundamentals and technicals do not always agree. This gives us some interesting insights, which I will share with you here.

(Editors’ note: do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article. Also note the different time scale on the x axis of each chart.)

QBE

Source: AmiBroker

QBE would be familiar to most investors as a home-grown insurance multinational. It is also familiar to most as a recent underperformer as one frustrating profit downgrade after another has ensured that the share price has remained subdued during the past few years. At the same time, the overall sharemarket climbed higher.

From under $4 in September 2001, QBE rallied to over $35 only six years later, cementing its reputation as a core stock in the minds of many investors. Despite halving in value by the 2009 market low, many investors continued to view QBE as a “good blue-chip” company and held on as the market raced higher and QBE drifted lower and lower. The low for QBE did not occur until 2012, when it dipped to $10.

QBE has stopped trending lower, but it is important for investors to note that it has not started an uptrend either. The chart above clearly shows that QBE is still in a sideways pattern. Each time it has come out with negative news in the past few years, the stock has found some good buying support near $10, but it clearly cannot get past the mid-teens either.

Changes by the new management and shifting macro factors are keeping investors interested in QBE. Short term, I can see support at current levels with a likelihood that in the next few months it edges back towards $16. But for longer-term holders, we need to see the high in 2013 to be breached. Once that is done, we have QBE forming a “higher high” and the potential start of an uptrend.

IAG

Source: AmiBroker

IAG sells insurance in Australia through well-known brands such as NRMA, CGU, SGIO and Swann. It also has a presence in New Zealand and Asia. The Asian presence received some further media attention in October with the announcement by CEO Mike Wilkins of his departure, followed by another announcement that IAG would not pursue further investment in China. The uncertainty around this strategy had been a drag on the share price.

Even the announcement of a strategic partnership with Warren Buffet several weeks earlier could not stop the share price falling. Like QBE, IAG bottomed out in 2012. But unlike QBE, IAG managed to bounce very strongly and trended higher for three years. During this time the share price went from under $3 to around $6.50.

At the time of its first-half results this year, IAG lost about 10 per cent of its value within two weeks. The share volume was also quite large on the way down, which was a negative sign. That sell-off saw IAG break the uptrend, triggering a sell signal for investors (red circle on the chart showing the blue uptrend line being broken). Since then the price has continued to head lower, finding a low under $5 in September.

This low is about a 50 per cent retracement of the uptrend that ran from 2012 to 2015. Such retracement is often a strong level of support for a stock. With the sharemarket overall looking more supportive and news of the scaling back of investment in China coming through, IAG could head higher from here in the short term.

However, it is important to look at the timing of a move. That is, the stock rallied for three years but only pulled back for about seven months. This tells me that we need more time before IAG can soar to new highs.

I believe IAG can head towards the high $5s in the short term but will come under selling pressure anywhere near $6, which could see it drift back again. We are likely to see IAG range-bound for at least several more months before a resumption of a longer-term uptrend.

AMP

Source: AmiBroker

AMP is more known for wealth management than for its life insurance business. In the recent past, the insurance side was seen more as a drag as lapses and claims increased, while a rising sharemarket was keeping the wealth management side producing healthy returns.

As a result, AMP has been trending higher during the past few years but the rate of growth in the share price has been a bit more flat compared to some other pure fund manager stocks.

If we concentrate on the part of the chart covering the past 12 months, it is showing that we should be getting good support for AMP at current levels. As with IAG, we need to look at the timing of the moves, and the rally earlier in the year was done in a much shorter time than the pullback from the recent high, which is a bullish sign.

As AMP goes on to retest the 2015 lows, there is likely to be some buying coming back, which could see AMP head towards $7 during 2016. The recent half-year results show improvements in the wealth protection business, along with other process improvements and cost management.

Medibank Private

Source: AmiBroker

Medibank Private has only been listed on ASX for a year but has proved popular with investors. One of the main reasons for investor optimism was around the notion that a private enterprise can reduce costs more effectively than one run by government.

After rallying for a few months after listing, the stock started drifting back towards the listing price as some investors looked to take some quick profits before the full-year results. The company more than delivered with the results, with margins much better than expected. This sent the shares up by more than 13 per cent on the day.

Since then the stock has headed back to its recent highs from earlier this year. We only have about 12 months of charting data to go on, but at the time of writing we received the surprise resignation of CEO George Savvides. With Medibank touching its recent highs, and almost all investors sitting on a profit, we would expect it to undergo profit-taking again with some likely support to come in around $2.25.

 

 

About the author

Michael Gable helps his clients achieve higher returns from their share portfolios by combining both fundamental and technical analysis. He is a media commentator who regularly contributes to Sky News Business, the Australian Financial Review, and online trading sites. Visit Fairmont Equities for a free trial to his weekly stock pick publication.

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