Insurers ready for the long, hot summer

With summer approaching and bushfires already scorching Sydney's fringes, insurers like Insurance Australia Group, Suncorp-Metway and QBE must be getting a little edgy. Although, this year, like all others, wouldn't be the same without a major insurance catastrophe and this is factored into risk and pricing models.

Since last year's bushfires and September 11, the general insurance industry has done pretty well in terms of fewer claims and higher premiums.

Based on figures from Aegis Equities Research, IAG's gross claims from last Christmas's bushfires were about $19 million (the net figure is the same because its reinsurance doesn't kick in until claims from one event pass $30 million), while Suncorp's and QBE's were about $10 million each before reinsurance reduced the net exposure.

IAG, which would bear the bulk of claims, didn't specifically nominate a figure at its recent annual results but talked about a $100 million exposure in total to September 11, bushfires and storms and specified that September 11 cost it $60 million. All this might lead to the conclusion that the insurers shouldn't have too much trouble bearing the claims cost in their home portfolios from more bushfires.

As IAG's Michael Hawker has already pointed out, the dry weather in NSW has had one positive offsetting effect. The number of car crashes and therefore car insurance claims in NSW has been reduced.

IAG fell 2c to $3.02.

Dough is rising

The drought is making life extremely difficult for farmers but it hasn't done a lot either for shareholders in Goodman Fielder.

The stock has dropped 10 per cent in a month to yesterday's $1.50. The decline is based on a simple equation: the higher wheat prices caused by the drought mean lower profits for bakers.

Salomon Smith Barney's Jonathan Snape, for one, has accounted for a $20-a-tonne increase in wheat prices in the second half of 2002-03. Current AWB pool price estimates suggest a rise of $48 a tonne.

SSB flagged the possibility of a 4.5 per cent downgrade to its forecast for Goodman Fielder's 2002-03 net profit ($125 million) if that bears out and the company doesn't raise product prices itself.

Last week, Goodman's chief executive, Tom Park, did raise the prospect of increasing bread prices again. As the company negotiates wheat prices 12 months in advance, it needs to push through its own price rise by the end of December to cover itself.

The company has about $70 million worth of shares still left to acquire as part of its $200 million buyback. That should support the share price for perhaps the next six months but the pressure from the drought isn't expected to abate soon.

Some like the resets

Not everyone's a fan of AMP's $1.15 billion reset preferred securities but Savingsfactory, which advises financial planning groups, believes they represent a good investment and should list at about $104, 4 per cent above the issue price.

This assumes AMP will claw back its A credit rating and puts little value on the potential equity upside with the conversion of the securities to AMP shares at prices above $20.

The main attraction is the 8 per cent plus distribution (the final rate is still to be set), fixed for five years.

With a margin of 2.9 percentage points over five-year rates, even if official interest rates rise over this period by, say, 150 basis points, investors will still be getting returns well above prevailing interest rates. The market is getting more discerning and some quite complex issues are on their way. The most pressing would seem to be Commonwealth Bank's latest effort. Because CBA has already done a large issue of hybrid equity (the PERLS) and must cast before us a slightly different instrument for capital management purposes, its coming $750 million issue is expected to be less oriented towards fixed interest investors, where the primary demand for hybrids has emerged, and tilt more towards equity.

The issue is expected to be in the form of a three-year mandatory convertible, offering a fully franked yield of about 6.5 per cent fixed for the three-year term. The bank is expected to announce the issue in the next few weeks, while Westpac will have its version out by the end of the year.

Biggest diamond yet

Diamond exploration is a patience game.

But Kimberley Diamond has learned that the transition to producer status can be equally frustrating.

Investors have been showing little interest in the company in recent months despite the fact that it is finally mining at its Ellendale diamond field in Western Australia.

The shares got a long overdue wake-up call yesterday after the company recovered an 11.47 carat diamond.

The news pushed Kimberley shares off recent lows, up 4c to 38c, as interest was finally reignited in the miner.

Kimberley said the diamond was the largest ever recovered at Ellendale, a whopping 1.5 carats bigger than anything previously found there.

It's good news for the company as it continues to bed down production at Ellendale, the first locally owned diamond mine in Australia in 20 years.

September quarter figures reveal that production at Ellendale is going better than expected, with Kimberley producing 6995 carats.

But the real upside for the company, analysts say, is the gem quality of its diamonds, which are better quality stones than those produced at Rio's nearby Argyle mine.