In a review of the Australian insurance industry, UBS has downgraded its recommendation on the sector to neutral from overweight following the recent strong outperformance.
"If all goes to plan, personal lines should enjoy a period of exceptional profitability over the next couple of years. We believe these peak returns are now largely factored into estimates and minimal room for error is implied by valuations, hence the downgrade,” the broker said.
In conducting the review, its two key exposures in Suncorp Group and IAG were both downgraded.
Suncorp Group was downgraded to neutral from buy as part of the broader sector view as well as the broker's opinion that, while there is the potential for further capital management initiatives over the next 12 months, it needs to see evidence of considerably better conditions across all of Suncorp’s divisions to justify materials valuation upside from current prices.
Having said that, UBS still raised its price target for the stock from $10.25 to $11.25 per share.
In terms of Insurance Australia Group, it downgraded the stock to sell from neutral ahead of what the broker expects to be a strong first half result in February. Nonetheless, UBS believes material upside beyond full year estimates is likely to be more elusive given return on equity is now close to 20 per cent and personal lines classes have been re-priced to highly profitable levels. IAG’s price to book of 2.3 times now implies minimal room for error.
Despite the downgrade, UBS still raised its target price to $4.60 from $4.30 per share.
MARKETS SPECTATOR: Fully insured
The insurance sector is performing well with more good results set to surface but, UBS says, the market has largely factored all that in.
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