General insurers see green shoots emerging
Price increases, balance sheet strength and defensive appeal are combining to make Australia’s general insurers the flavour of the month. This comes as investors are becoming disillusioned with the life and health insurance sectors.
Topline growth across personal and commercial lines and a bigger-than-expected reserve release is positive for Insurance Australia Group, Suncorp Group and QBE Group even though they are grappling with claims inflation on one front and natural disaster budget blow-outs on the other.
Interestingly, Morgan Stanley’s latest shop-around survey on personal lines insurance shows a surge in new car and home insurance business. Its New Premium Index for the June quarter indicates new business in motor was up 18 per cent year-on-year, broad-based across all three major cities.
The rise largely reflects re-pricing efforts in the second half of 2016, according to insurance analyst Daniel Toohey.
The Home Index looked to be down 1.6 per cent year-on-year. However, after adjusting for the lower New South Wales emergency services levy, the Index rose a solid 9 per cent.
The strong pricing momentum in motor likely reflects insurers seeking to address elevated claims inflation, which is the not-so-good news and industry-wide combined ratios remain above 100 per cent, which is also not great.
“Claims severity continues to suffer from rising cost to repair technology embedded in cars and the proliferation of claims management specialists supporting not-at-fault drivers is creating leakage out of the smash repair supply chain,” said Toohey.
In a client note, he detailed the continued challenges at Insurance Australia Group and Suncorp Group given CAT budget overruns at both companies over the 2017 financial year.
“Therefore, premium increases largely reflect insurers fixing mis-pricing of CAT risk in prior periods.”
Toohey is the first to admit that despite repricing momentum, the underlying margin recovery for personal lines insurance remains a grind.
On the other hand, he added, while CATs have been high and yields remain depressed, benign wages growth and no superimposed inflation likely means reserve releases will feature heavily in the general insurers’ results.
IAG has flagged the release of reserves would total at least five per cent of net-earned premium, ahead of earlier guidance of at least 1.5 per cent, which will expand profit margins for this year.
The releases largely relate to a favourable experience against its expectations on claim size and inflation for its Australian 'long-tail' classes, insurance business involving coverage of risks where a claim may not be received for many years, the company said in late June.
That tells Toohey that Suncorp and QBE Insurance Group will also likely exceed their 1.5 per cent and 1.0 per cent guidance respectively - both now and in the future.
In fact, he is expecting Suncorp to double its reserve release to 3 per cent of net premiums for 2017.
Nevertheless, investors expecting the Queensland bancassurance group to deliver a similar upgrade cycle to IAG risk disappointment, given Suncorp’s dire need to fix the CAT budget.
This, plus a lack of self-help options like IAG’s cost out program dampens the affect of a stronger reserve release as well as topline growth in Suncorp’s home and motor lines.
"The CAT budget has likely been fully exhausted,” Toohey said, noting gross losses from the Kaikoura earthquake and Cyclone Debbie exceeded $1.2 billion.
Suncorp is likely to revise its budget to 9.1 per cent of net premiums, from 7.7 per cent budgeted for 2017. Further, despite a ton of bad press recently, Toohey thinks the tide seems to be turning for QBE.
Naturally, he is keen to see greater clarity on the insurance giant’s recent profit downgrade caused by the late discovery of a claims blow-out in its emerging markets business.
But from where he sits, QBE's outlook is buoyed by the improving Australia and New Zealand markets, green shoots in the US and reduced rate declines in Europe.