A catastrophic summer for insurers

A catastrophic summer for insurers

Australia’s three biggest insurance companies are feeling the pain as bushfires and hailstorms start a year that’s shaping up to be extremely challenging

By Bernice Han

There was never any doubt that the bushfire season was going to hurt Australian insurers. As the season broke out earlier than usual in the spring and spiralled into the worst bushfire summer since Black Saturday in 2009, concerns mounted over the scale of the fallout on the industry.

So by the time QBE’s financial results came out on February 17, a week after Suncorp and IAG reported their earnings, it more or less confirmed the industry has indeed taken a battering.

For IAG and Suncorp, the financial hit has been particularly acute, with the two leading personal lines insurers returning weaker first-half earnings for the six months to December 31.

At IAG, net profit slumped 43% to $283 million, although some of the drag-down effect was caused by the sale of its business in Thailand last year and an expensive customer remediation program.

Of particular significance was the decline in the reported insurance margin to 13.5% from 13.7% a year ago, thanks to the bushfires. Bracing for a potentially bumpy road ahead, IAG again cut its full-year reported insurance margin forecast on the day the first-half results were released.

The insurer’s latest forecast calls for a 12.5-14.5% reported insurance margin, down from a revised January estimate of 14.5-16.5%, to take into account the impact of the bushfires and also other natural catastrophes that broke out this summer.

IAG also raised its full-year net natural perils allowance to $850 million from $715 million to factor in the storms and other wild weather events that have made this summer an extremely costly one for the industry.

IAG’s Chief Executive and Managing Director Peter Harmer says reinsurance costs are likely to rise and there will be some event-driven claims inflation.

Increasing catastrophe costs are likely to be reflected in next year’s allowance, but the company won’t “over-react to what seems like an unusually high period of perils,” he said.

Before the downgrade in January, the insurer was hoping for a reported insurance margin of 16-18%. It’s likely that a further revision will be necessary once the impacts of the coronavirus pandemic are better understood.

Over at Suncorp, its Australian insurance business suffered a 3.9% fall in after-tax net profit to $123 million in the December half while insurance trading earnings declined 22.5% to $148 million.

The insurer incurred about $519 million in first-half natural hazard costs, busting its $410 million allowance by $109 million.

While QBE enjoyed a 41% rise in full-year net profit to $US550 million in 2019, its Australian Pacific business was not spared as net cost of catastrophe claims worsened to $US193 million or 5.4% of net earned premium. In 2018, the portion was 2.8% of net earned premium or $US106 million.

QBE has since been forced to withdraw its guidance for financial targets this year due to the uncertainty caused by the coronavirus outbreak. The insurer had previously flagged a combined operating ratio of 93.5- 95.5% and an investment return of 2.5-3.0%.

Analysts say the financial results of the Big Three insurers, viewed widely as an indicator of the state of the industry, suggest they have appropriate reinsurance measures in place to absorb the natural catastrophe losses.

“Despite the impact of the bushfires, the sector’s resilience is highlighted by the high levels of reinsurance protection, particularly with respect to natural catastrophes,” Frank Mirenzi, Vice President and Senior Credit Officer with Moody’s Investors Service, tells Insurance News.

“We expect insured losses will continue to mount from adverse weather events in January and February, but the reinsurance protection is likely to absorb much of those costs. We expect some premium rate rises are likely, which will benefit the sector into next year.”

Morningstar’s Equity Analyst Nathan Zaia does not rule out the possibility of earnings downgrades between now and the end of this financial year. But he says the Big Three do have some positives that give cause for optimism.

“Natural perils definitely took centre stage of the insurers’ results this earnings season, which is not

surprising given the number and severity of events,” he tells Insurance News.

“We try to not get too hung up over the next 12 months earnings though. We like some of the underlying trends, with Suncorp returning to volume growth in motor and home.

“IAG is continuing to reduce the underlying cost base and it leaves the businesses in better shape under more normal circumstances.

“While more frequent and severe weather events becoming the new norm is a risk, we think the insurers will pass it on to customers in the form of higher insurance premiums. Ultimately, all players in the industry will be experiencing higher claims.”

Figures from the Insurance Council of Australia show insured losses from the November-declared bushfire catastrophe have risen to $2.2 billion, surpassing Black Saturday’s $1.76 billion in normalised value.

When combined with this summer’s other wild weather events, such as the damaging hailstorm in Canberra, overall insured losses from declared catastrophes since November have cost the industry more than $4.5 billion.

Of course, the three insurers’ results were announced just as the emerging coronavirus in China’s Wuhan province was coming to light. Since then a lot has changed, and the impact on insurers’ earnings from whatever the resulting pandemic brings to the Australian market in economic terms is impossible to estimate.