Upbeat outlook for insurance stocks

Zoë Fielding

Barring further catastrophes, insurance companies should be more profitable in 2013 than they have been in the past two years, according to a report on the sector.

Last year was a good one for general insurers. Household insurers’ expenses plus claims fell to 83 per cent of their premium income from 107 per cent in 2011, according to the 2012 General Insurance Barometer, prepared by JPMorgan Insurance and Taylor Fry Consulting Actuaries.

Benign weather conditions throughout 2012, coupled with increases in premiums since the Queensland floods of 2011 lifted the insurers’ profitability last year.

Across all classes of domestic and commercial insurance, insurers’ businesses were more profitable, the JPMorgan/Taylor Fry report showed.

Shares in listed insurance companies have rallied in response, also supported by investors seeking high yields that are not linked to the weakening domestic economy.

Suncorp’s shares have risen 26.7 per cent in the past 12 months, while IAG added 72.8 per cent. QBE, which has its own internal problems, gained 3.66 per cent over the past 12 months.

The year ahead

“In 2013, the industry is expecting further improvement in profitability but that depends on how weather conditions transpire. Given last week’s floods, any further catastrophe might impact on profitability,” JPMorgan senior insurance analyst Siddharth Parameswaran says.

He estimates the Queensland floods that started over the Australia Day long weekend will cost the sector between $350 million and $500 million.

That’s not much compared with the 2011 Queensland floods, which cost insurers about $2.4 billion, cyclone Yasi which cost $1.4 billion, and the Christchurch earthquake which cost the sector between $15 billion and $20 billion.

Parameswaran says the outlook for the Australian economy looks good in 2013, which will also help insurers.

“The big concern for insurers comes from low yields on fixed interest investments that insurance companies in Australia typically hold backing their liabilities. For long tail products, where claims generally take longer to settle, in particular this can make substantial differences to returns in the absence of adequate premium rate increases,” he says.

Many stock analysts have been lifting their target prices for insurance company stocks for 2013.

But not all believe insurers will outperform again following the strong rise in their share prices and a potential peak in their profitability. On Friday, UBS analyst James Coghill cut his ­recommendation on Suncorp from “buy” to “neutral” and IAG from “neutral” to “sell”.

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