Insurers made hay during a respite from natural disasters, as premium growth slowed
By Wendy Pugh
A rare calm on the natural catastrophe front lifted insurer earnings in the latest results, released before Cyclone Alfred threatened Queensland, while pricing adequacy is being closely watched.
A jump in bottom-line profits was expected as bank sale proceeds boosted Suncorp and IAG released covid-related business interruption reserves, while QBE benefited from loss-making portfolio exits and reduced exposure to natural perils volatility.
The results also show gross written premium growth rates easing from previous double-digit levels, as inflation slows and amid discussion about an end to the insurance hard market.
JP Morgan analyst Siddharth Parameswaran says GWP numbers were “not bad by any stretch of the imagination”, but IAG’s share price dropped sharply after it downgraded guidance and on concerns over the shifting rate cycle and potential competition pressures.
“We had very strong expectations from the market leading in, and I think that anything that might have been taken as a negative probably got amplified,” Mr Parameswaran tells Insurance News.
“You can’t get double-digit top-line growth forever and at some point it has to come back.”
IAG’s first-half profit jumped 91% to $778 million and GWP rose 6% to $8.4 billion. The company’s shares fell about 12% after it forecast financial-year premium growth “towards the lower end” of its mid to high single digit outlook.
Chief executive Nick Hawkins notes labour and supply chain cost pressures have eased, with the trend more apparent in New Zealand than Australia; the reinsurance market has stabilised; the company is not pricing below inflation; and the market remains rational.
“This moderation in premium increases we’re seeing across our portfolios is, of course, a positive for our customers,” he told an earnings briefing.
The company, which is awaiting clearance from the competition regulator for its proposed RACQ Insurance acquisition, says its capital position leaves it “well positioned to consider opportunities”.
At Suncorp, CEO Steve Johnston told investors the underlying business is performing well, while cautioning that an 89% headline half-year profit jump to $1.1 billion was boosted by the bank sale and volatile investment and perils factors.
“The hazard allowance and investment market performance should always be considered on a full-year basis,” he said. “The position … can change markedly in the second half with one or two hazard events, and the utterances of a global leader anywhere in the world can adjust risk appetite in investment markets.”
GWP rose 8.9% to $7.5 billion, including home and motor increases of 10% and a rise of 6% in New Zealand, which has experienced greater price moderation.
Macquarie Equities says volume growth in commercial lines is notable, while Suncorp says platform margins and price need to improve, with further work required on risk selection.
Mr Johnston says the company is “very focused” on home underwriting quality now it can risk-price across perils, and the book has improved even with net volumes remaining the same. He urges disaster mitigation investment, the removal of insurance taxes, and innovation to boost affordability.
Suncorp expects GWP growth in the mid to high single digits for the financial year as pricing moderates in line with easing inflation in many portfolios, and it plans to pursue efficiency gains, including in claims handling, to keep margins strong. The company re-affirmed guidance for a full-year underlying insurance trading ratio towards the top of the 10%-12% range.
Reduced natural catastrophe impacts were also welcomed by QBE, which says exposures to US hurricanes Milton and Helene were substantially lower than for similar events in the past following actions to reduce earnings volatility.
Group full-year profit rose 31% to $US1.779 billion, and GWP rose 3% to $US22.395 billion as portfolio exits curbed top-line gains.
The average renewal rate increase across the North America, international and Australia-Pacific divisions was 5.5%, compared with 9.7% a year earlier. The combined operating ratio improved to 93.1% from 95.2%, with North America returning to profitable territory despite crop business difficulties.
Group CEO Andrew Horton says the company has “the breadth, both by region and product, to be capable of delivering mid single digit volume growth sustainably”.
S&P Global Ratings analysts say QBE’s results this year should benefit from rate strength and better risk selection, although social inflation will produce some drag in casualty.
A $US200 million net exposure to the January’s California wildfires should mostly affect the international division.
“Despite 2024 being a year of heavy catastrophe losses for the global insurance market, QBE’s exit from some higher-risk property portfolios in recent years softened its losses,” the analysts say.
Morningstar’s Nathan Zaia says while rate increases have slowed, QBE sees them meeting inflation.
He sounds a note of caution on volume growth aims, echoing broader concerns for the sector: “Our reservation is that in the commoditised industry, competitors will also think ‘more volume, please’, and increased competition typically leads to rate pressure and lower industry returns.”
Hard no to a soft market
Steadfast and AUB Group have rejected concerns over slowing Australian and New Zealand premium rates as they focus on local growth and international expansions.
“There was some moderation in the pricing, as we know, in the December quarter, but we actually had plenty of other revenue uplifts or expense-saving initiatives throughout the group to counter that,” Steadfast chief financial officer Stephen Humphrys told a briefing.
The broking group’s first-half underlying net profit rose 20.9% to $128.1 million.
Organic growth accounted for 9.1% of a 14.6% increase in underlying earnings before interest, tax and amortisation, and acquisitions contributed 5.5%.
Steadfast says its international business, comprising the US-based ISU network, UK operations and UnisonSteadfast, performed ahead of expectations.
The company acquired HW Wood and HWI France late last year and has brought its existing Steadfast Placements team under a rebranded London-based HWS Specialty banner.
Australasian network brokers delivered a gross written premium increase of 7.9% to $6.5 billion and underwriting agencies GWP rose 11.7% to $1.22 billion.
AUB says it is in the early stages of replicating its Australian model overseas as it builds a multinational insurance services group.
First-half underlying earnings increased 13% to $79.3 million and revenue rose 12.1% to $712.6 million, with gains across Australia and New Zealand broking, agencies, Bizcover and the international division.
Pre-tax profit for the international division, which contains Tysers, UK retail and managing general agencies, fell 20% to $30.5 million including a one-off drag from aligning bonus periods and from teams formerly part of the operation.
Chief executive Michael Emmett says there has been some rate softening in classes to which AUB is not too exposed, but broadly, rises of about 5%-10% are likely over the longer term, while commissions, fees and other levers can be adjusted.
JP Morgan notes that AUB reiterated it can withstand some rate softening as brokers had offered discounts on headline commission rates when price increases were strong and has scope to reduce discounts in the case of slowing rates.
Mr Emmett believes volatile geopolitical environments and elevated global natural disasters are likely to underpin premiums for the foreseeable future.
“I’ve said that I believe premium rates will go up for the rest of my lifetime, and I think that remains my categoric view,” he says.
