The latest quarterly data from the prudential regulator has revealed that the general insurance industry is at a crossroads as data signals improved short term profitability.
Underlying top-line and bottom-line trends in APRA's September stats for both Personal Lines and short-tail Commercial Lines are looking good, according to UBS analyst, James Coghill.
That said, the analyst noted that September is but a single quarter of good news and one in which some top-line data-points looked odd.
Nevertheless, Coghill thinks the solid top-line momentum in Domestic and Commercial Motor is encouraging, driven by 5 to 6 per cent rate increases.
From where he sits, profitability metrics also continue to improve particularly in Commercial short-tail classes, albeit it off a low base.
They have also improved in Compulsory Third Party insurance while Domestic Motor has stabilised and should turn as ongoing premium rate rises flow through.
“We therefore continue to view 2017 as a pivotal turning point for general insurance margins and prefer Suncorp Group over Insurance Australia Group,” said Coghill.
The analyst pointed to big distortions in the gross written premium numbers distortions from IAG.
First quarter trends for GWP were impacted by IAG's licensing restructure and Fire Service Levy changes, resulting in reported direct insurer GWP dropping 2.7 per cent on the previous corresponding period.
“Similarly, while less impacted by intra-group licensing changes, low GWP growth in Home (up 2.3 per cent) and Commercial Property (up 1 per cent) disproportionately reflect FSL impacts,” Coghill said in a note after analysing the APRA stats.
On a rolling 12 month basis, Commercial Property average premiums have risen 7.0 per cent with Home up 2.2 per cent, this analysis showed.
“With less FSL impact, Motor GWP statistics provide a cleaner view of underlying trends with Domestic Motor rising 5.4 per cent and Commercial Motor increasing 6.3 per cent on the year ago same quarter, driven largely by premium rates.”
Still, in CTP, GWP declined by 16 per cent on the previous first quarter reflecting cumulative price reductions in Queensland and more recent reductions in New South Wales CTP.
According to the insurance specialist, the good news is that combined operating ratios have improved across most classes
“Unlike GWP, profitability metrics are not impacted by licensing and FSL changes with Direct insurer CORs improving to 86.4 per cent in the 2018 first quarter versus 89.7 per cent in the year ago same period,” noted Coghill.
Commercial Property improved most with a COR of 84.5 per cent - down from a whopping 103.2 per cent for the previous corresponding period - most likely reflecting a combination of higher rates earning through and lower large risk claims.
“Despite solid written premium rate rises, Domestic Motor profitability is yet to improve with rolling 12 month CORs relatively steady at 101 per cent over the past three quarters.
“However, in Commercial Motor where inflation headwinds have been less pronounced, CORs are starting to improve – falling to 102.5 per cent over the last year from 106.2 per cent.
In CTP, undiscounted current year loss ratios continued to improve to 91.4 per cent from 93.1 per cent at June 2017.
The general insurance industry has recorded an after-tax net profit of about $3 billion for the year to September 2017, according to the APRA stats, down 1.9 per cent on the previous year.
The profit drop was due to a 47.1 per cent leap in underwriting to $3.8 billion being offset by a 31.8 per cent plunge in investment income to $2 billion.