Investor Spotlight: Insurance companies thrive amid economic challenges

Insurance companies riding high

While you might be unhappy with recent changes to your insurance policies, the companies providing these essential services to Australians are thriving. Insurance providers and brokers have emerged as some of the top performers in the ASX 200 year-to-date (YTD) and over the last 12 months. Brokers remain optimistic about their outlook.

QBE leads the pack

QBE has been the top performer, rising 32.3% year-on-year (YoY) and 17.9% YTD, with IAG up 31% YoY and 20% YTD.

Suncorp has faced challenges due to the sale of their bank to ANZ, which is currently under investigation by the ACCC.

Insurance brokers have also shown impressive results. AUB has risen 58% YoY and 27% YTD, Steadfast 16% YoY and 6.9% YTD, while smaller broker PSC Insurance is up 17% YoY and -3.2% YTD.

These companies have significantly outperformed the banks, with CBA being the exception, with a 6% YoY increase.

Industry tailwinds and growth potential

Catastrophic weather events and low-interest rates have heavily impacted insurance companies in recent years.

The La Nina system, which caused major floods across Australia and New Zealand, significantly affected claims and reinsurance costs for providers. However, as we transition from La Nina to El Nino, the expected impact of major events on insurers is declining.

Historical data indicates that El Nino weather systems result in approximately 40% less catastrophe losses for insurers compared to La Nina.

Favourable conditions and premium increases

As we move to a more favourable weather system, insurance companies are further benefiting from substantial price increases for insurance policies.

Premiums in New Zealand have risen between 20% to 30% for homes and around 20% for motor vehicles, while in Australia, the increase is approximately 20% for homes and 15% for motor vehicles.

Commercial property and vehicle sectors in New Zealand have experienced steep rate rises, leading to an average 20% increase in premiums. Additionally, higher interest rates generally provide a tailwind for insurers as they aim to generate returns on premiums to offset future claims.

Which companies are in the driving seat?

Among brokers, AUB, PSC Insurance, and Steadfast are favoured stocks, with Macquarie ranking AUB as the top preference based on valuation metrics. AUB is currently trading on 20x FY24 earnings forecasts, offering a 2% yield with a 3.0% upside to the average broker target price of $29.59.

Jarden has set a standout 12-month target price of $32 for AUB.

In terms of insurance providers, Morgan Stanley anticipates earnings upside from a drier Australian winter. IAG and Suncorp have higher exposure to motor vehicles and personal lines like housing. Suncorp, trading at a 9% discount to the average broker price target, offers an attractive 5.7% yield for FY24.

QBE, with a greater exposure to the US market, is trading at a 6% discount to the average target price of $16.53 and offers a low multiple of 11x FY23 earnings and a 7.6% yield. IAG, while trading at a 6.8% premium to the average price target of $5.34, still delivers a 4.6% dividend yield for FY24.

_{Broker forecasts and data sourced from FNArena.}