Inflation and reinsurance costs are driving rates higher as insurers focus on improving profitability
By Wendy Pugh
Rising premiums and the pace of further increases was a focus during the latest earnings season, as insurers tackle entwined repercussions from inflation and escalating natural disaster costs.
“Insurers face a balancing act,” S&P Global Ratings Insurance Analyst Craig Bennett says. “They are increasing premium rates to offset the rising cost of claims, [but] this risks making policies less affordable at a time when the cost of living is rising, which could dampen new business growth.
“At the same time the cost of catastrophes appears to be increasing.”
Despite the difficulties, S&P expects property and casualty insurers’ underlying profitability will likely strengthen this year as premium rate gains support earnings. It views the broader sector as equipped to handle the confluence of challenges.
IAG and Suncorp, which reported December half results, and QBE Insurance Group, which delivered full-year earnings, are each responding to claims inflation, natural catastrophe losses and tougher reinsurance markets.
“There’s some timing differences in terms of lifting premiums to cover claims inflation, but generally we’re seeing all the insurers successfully put up prices,” Morningstar analyst Nathan Zaia tells Insurance News. “I’m pretty positive on the earnings outlook for them.”
Further increases are on the cards, even as labour markets and supply chain pressures may ease, while higher interest rates should increasingly assist earnings.
“The tailwind they have is the higher investment income coming through, so that can help their bottom line,” Mr Zaia says. “They still have claims inflation [and] the reinsurance costs are going up, so I think there’s reason to believe the premiums will still be rising.”
IAG says motor experienced almost a perfect storm in the December half. Labour and parts costs rose, deliveries were delayed, repair times extended and car rental costs increased. The underlying margin was hit as premium rises lagged behind surging costs.
The company cut its full-year reported insurance margin guidance to around 10% from 14-16%, also reflecting rising natural peril losses, the Auckland floods and reinsurance. The firm increased the perils allowance to $1.145 billion from $909 million after the Auckland event.
Net profit rose to $468 million from $173 million in the year-earlier half on higher gross written premium (GWP) and a $252 million benefit from reducing the covid-related business interruption provision.
Recent rate increases are flowing through and the insurer expects a better second half, and full-year GWP growth of around 10%, but some analysts have queried the company’s outlook confidence.
“We think the environment for all general insurers has improved in recent months, given a consistent desire to raise prices by all, but the starting point on underlying margins for IAG causes us to have some concern about the ability to reach their targets,” JP Morgan analysts say in a research report.
The extent of damage from Cyclone Gabrielle, which caused massive damage in New Zealand’s North Island just weeks after the Auckland floods disaster, was unknown as earnings reports were delivered. In contrast, Australia’s summer catastrophe season through to early March was relatively benign.
Suncorp Australian insurance after-tax earnings rose 142.1% to $276 million, with GWP up 12.1% in home and 11.7% in motor, adjusted for portfolio exits. The New Zealand general and life result increased 2.5% to $83 million, while the sale of the bank remains on track.
Underlying Profitability expected to stabilise
Source: S&P Global Ratings
JP Morgan says Suncorp appears to be “in a simplification phase strategically and a consolidation phase operationally”. The bank divestment adds some uncertainty and the company, like others, faces reinsurance and cost inflation headwinds.
Suncorp affirmed its fiscal-year targets and left its natural perils allowance unchanged at $1.16 billion despite costs in the first half reaching $679 million, which exceeded the allowance by $99 million.
The company acknowledges rising costs have required it to continually adjust premiums charged to customers, particularly in higher risk areas, adding to cost pressures. But it says the value ascribed to insurance has never been greater, particularly for those assisted in putting their lives back together.
Moody’s Investors Service Vice President Frank Mirenzi says that in addition to passing on costs, the use of panels of repairers also helps combat inflation. When it comes to competitive pressures, smaller rivals may be more inclined to follow suit on price increases, rather than seeking to take market share from IAG and Suncorp.
“If others start to undercut [the major insurers] in price, then maybe that’s a signal for them to start slowing down the increases,” he says. “Conversely, the other players who have smaller market shares are able to ride on their coat-tails. If they see Suncorp and IAG putting their prices up by significant amounts they can follow suit if they like.”
Global insurer QBE, which has more of a commercial focus in the local market, reported full-year net profit rose to $US770 million from $US750 million a year earlier. GWP increased 13% to $US20.1 billion on a constant currency basis.
The Australia Pacific, International and North America divisions all provided positive contributions, with the latter reporting a return to underwriting profitability for the first time in four years.
The group is seeking to deliver greater consistency across its businesses after giving investors a roller-coaster ride in past years, and surprised analysts on the upside in its latest earnings report.
S&P says QBE’s result was ahead of its forecast, and a focus on business quality, premium rate adequacy and balance sheet protections should support earnings and further top-line growth this year.
“The result reflects recent company actions to improve resilience and consistency amid a spike in global natural catastrophes and interest rate volatility,” it says.
QBE’s net cost of catastrophe claims rose to $US1.06 billion compared to the $US962 million allowance. The company increased this year’s allowance to $US1.175 billion, reflecting exposure growth and “non-renewal of certain CAT buy down covers”.
Natural catastrophes and the tougher reinsurance market remain a front of mind issue for insurers as they balance questions on value, volatility protection, risk-sharing and costs to be passed through to customers.
“There are things they can do, in thinking about the structure of the reinsurance program, to make it cost-effective, but it still has to provide them with the level of cover they want to give them the kind of protection they want for their profit profile and balance sheet profile,” Mr Mirenzi says.
Insurers say customer retention rates remain strong despite premium rate gains, suggesting headroom remains for further increases to offset costs.
“At some point the ability to keep passing-on rates runs out, and that will be the junction where hard decisions have to be made, but we’re not seeing that just yet,” Mr Mirenzi says. “There’s a bit more to play out in terms of those price increases through this year.”
Investors find broking companies are a good place to park their money
Acquisitions and rising premiums are growth engines for the stock exchange listed broking companies, which raised earnings guidance as the first-half delivered buoyant results
Major locally owned broking groups Steadfast, AUB and PSC Insurance are variously making acquisitions while delivering improved results from existing operations as strong insurance markets provide tailwinds.
“The firm premium rates environment helps from a commissions perspective, and probably also increases demand for their services,” MST Marquee Emerging Companies Analyst Scott Hudson tells Insurance News.
“It is a tough environment for companies to be dealing with. In some cases, there are pretty aggressive rate increases, and capacity being withdrawn in some areas of the market, increasing demand for help in placing complex risks.”
During the half AUB Group completed its purchase of London-based wholesale group Tysers and is spinning-off Tysers’ retail operations into a joint venture with PSC, which has separately been expanding its UK footprint.
PSC made further UK and local acquisitions during the half and has taken a 40% stake in insurance building company Bay Building Group.
Steadfast, which operates the largest broking network in Australia and New Zealand, has acquired Insurance Brands Australia and is raising holdings in existing network businesses through its “trapped capital” program.
“All three management teams are executing on their strategies, which are all helping to deliver top-line and margin expansion, and that helps to drive earnings and share prices higher,” Mr Hudson says.
Morningstar analyst Nathan Zaia says a focus by insurance buyers on gaining the best value as costs increase encourages businesses to use a broker. The groups also have continuing scope to increase equity holdings in network firms as those businesses evolve and generational change takes place.
“You’ll have brokers within the network that get older and think about moving on and are more open to selling stakes,” Mr Zaia says. “I think there’s still a long pipeline.”
Macquarie Equities has an “outperform” rating for the three big local broking companies, reflecting positive operating conditions and a premium rate cycle that remains strong.
The sector can be seen as a hedge against inflation and interest rate impacts, and share prices have been supported by increased investor interest. Broking at the moment seems a good place to be.
“You are seeing a number of big investors in Australia buying brokers at this point,” Macquarie Equities Senior Equity Research Analyst Andrew Buncombe tells Insurance News.
“If you think the economic environment is going to get more bearish over the next six, 12, 24 months, then the purchase of insurance is very resilient.”