Equity Strategy
22 May 2024
Insurance: Premium Opportunity
Insurance Fundamentals Remain Robust

The outlook for the Australian insurance sector remains attractive with positive earnings momentum likely to persist over the medium-term. 

Recent industry read-throughs have been supportive of our positive stance towards the sector, which is underpinned by a strong repricing cycle, coupled with easing cost pressures as claims from catastrophic weather events normalise after a tough period for natural perils. 

In combination, these factors will drive the continued recovery in insurer margins over the medium-term which is still not fully reflected in consensus in our view. 

The Focus Portfolio retains an overweight exposure to the insurance sector relative to the ASX 300. Our preferred general insurance exposure is Insurance Australia Group (IAG) (Focus Portfolio 3%) and our preferred insurance broker is Steadfast Group (SDF) (Focus Portfolio 2%). These companies are the focus of this report. 


Mild Weather Creates Downside Risk For Perils Costs

Despite a wetter than expected El Niño climate pattern in 2023-24, the historic tendency of El Niño periods featuring significantly lower than catastrophe (CAT) losses has played out in line with our expectations. 

So far, in FY24 there have been only three major CAT events identified by the Insurance Council of Australia: the Christmas Storms (QLD, NSW, VIC), Tropical Cyclone Jasper (QLD), and the Valentines Day Storms (VIC). We note that historically ~50% of CAT losses have been incurred in the March quarter. As such, as it stands industry CAT claims are likely to decline in FY24 versus FY23 to the lowest level since FY18. 

In 1H24, IAG’s natural perils costs were 5% lower than its allowance. Considering the sequential decline in perils costs in 1H and the downward trend in industry-wide CAT loss claims, we are confident IAG can under-run its allowance again in 2H24. 

Lower natural perils costs, coupled with easing general claims cost pressures and plateauing reinsurance costs, in our view is likely to support a better than expected improvement in insurance margins over the medium-term.

Figure 1: FY24 is on track to be the second consecutive year of below average catastrophe losses…
Figure 2: … which suggests IAG’s perils could surprise to downside (again)

Strong Repricing Cycle Creates Upside Risks For Premium Growth

ABS data points to continued repricing strength

The insurance policy repricing cycle has gone from strength to strength this year with the latest ABS CPI dataset showing annual insurance price inflation of +16.4% YoY in the March quarter, making this the sharpest rate hardening cycle in decades. 

Premium repricing is driving double-digit gross written premium (GWP) growth for the major Australian general insurers, which will drive the continued recovery in insurance margins across the sector over the medium-term following a period of lacklustre profitability amidst the significant rise in natural perils between FY19-22. 

In light of the acceleration in insurance price inflation in the three months ended March 2024, consensus expectations for IAG’s GWP growth appears conservative, with the street currently forecasting a deceleration in IAG’s GWP growth in the 6 months to June 2024.

Figure 3: Australian insurance price inflation has risen to multi-decade highs
Figure 4: ABS data suggests consensus forecasts are conservative on IAG’s premium growth

Peer read-through: Allianz Australia’s premium growth accelerated in the march quarter

Allianz’s Q1 2024 quarterly report has provided a fresh read-through for the Australian domestic insurance sector, which we note is relatively concentrated among the top 4 players: IAG, Suncorp, QBE, and Allianz. 

In the March quarter, Allianz Australia reported GWP growth of +14.2%, which was an acceleration from +12.1% in the December quarter. This could be reflective of a somewhat prolonged repricing cycle, which stands in contrast to consensus expectations for repricing to moderate over the next 12 months. 

Importantly, all of the major general insurers have remained highly rational this cycle, with their ongoing focus being on improving their insurance margins (which remains below target for most insurers) through continued repricing, rather than competing aggressively for market share. This rational backdrop is supportive of a ‘higher for longer’ repricing cycle. 

On this basis, in our view there are upside risks to consensus GWP forecasts, which expect IAG to deliver GWP growth of ~10% in Australia in 2H24 before more or less ‘trend’ GWP growth in FY25. 

Figure 5: Allianz’s Q1 suggests consensus may be too conservative for IAG’s 2H24 premium growth

Strong Premium Growth and Easing Costs Together Supports Higher Margins

Margins are well placed to continue expanding into FY25 as ongoing premium repricing progressively ‘earns through’ (noting it takes ~12 months for a repriced policy to impact the bottom-line in full), while at the same time cost pressures moderate. 

Considering both the strength of this rate hardening cycle relative to previous cycles and the downside risk to perils, there are upside risks to consensus insurance margin estimates for IAG in FY25/26 in our view. 

With consensus estimates suggesting margins will peak at ~15% in FY26e – well below prior cycle peaks of ~18% in FY14 and FY18 - there is still ample room for analyst upgrades from here.

Figure 6: Consensus margin estimates are conservative relative to previous cycles

IAG Still Our Preference: Suncorp Has Lost its ‘Conglomerate Discount’

Suncorp’s (SUN) mooted spin-off of Suncorp Bank (targeted for completion in mid-2024 subject to final regulatory/ legislative hurdles) will transform it into a pureplay general insurance company, which makes the company a higher quality proposition for investors in our view.

While we have previously flagged the potential for SUN to re-rate higher closer to IAG’s valuation multiple as the proposed spin-off progresses, SUN’s valuation upside is now negligible in our view as it has effectively already shed its ‘conglomerate discount’ based on its forward PE multiple relative to IAG. 

IAG deserves to trade at a premium to SUN in our view, due to its greater scale as the domestic market leader, its stronger medium-term earnings outlook, and its superior underwriting record which underpins better insurance profit margins and a higher ROE. 

Therefore, with SUN trading at close to parity with IAG on a forward PE basis, we view SUN’s relative valuation as stretched and retain our preference towards IAG. 

Figure 7: SUN’s relative valuation is stretched vs its historical range

IAG Remains Our Preference Among the General Insurers

IAG is held in the Focus Portfolio at a 3% weight, which provides exposure to the attractive fundamentals of the domestic general insurance sector. 

IAG remains attractively valued at forward PE of ~16x which is a modest discount to history and represents good value considering consensus expectations for a 3-year EPS CAGR of ~16% (with risks skewed to the upside in our view). 

Moreover, the capital return story remains supportive of shareholder value. In addition to IAG’s existing $200m buyback (~75% complete), we anticipate further capital management initiatives over the medium-term given the likelihood of further Business Interruption (BI) provision releases (provision is currently ~A$400m) following favourable court rulings. 

Figure 8: IAG’s ROE remains below prior cycle highs
Figure 9: ASX 100 insurance sector – key fundamental metrics
Company Ticker Fundamental metrics (12 month forward) Consensus earnings growth* Company description Focus Portfolio holding
P/E P/B ROE Dividend yield Franking Grossed up yield CY24 CY25 CY26 3 yr CAGR EPS revisions (NTM) - last 6 mths
ASX 100 - General Insurers
Insurance Australia Group IAG 16.0 2.2 15% 4.7% 66% 6.0% 38% 8% 5% 16% 9%

IAG is the leading personal lines insurer in Australia (~30% home/motor market share) and New Zealand (~60% home/motor market share). IAG is currently the only 'pureplay' exposure to the Australia-Pacific general insurance sector on the ASX and therefore, offers the most leverage to the attractive underlying fundamentals of this market.

QBE QBE 9.6 1.6 17% 3.9% 10% 4.1% 35% 3% 4% 13% 9%

QBE is a large global general insurance and reinsurance company with a diverse service offering throughout ~50 countries, with ~25% exposure to the Australia Pacific market. QBE's track-record has been mixed historically with a number of unprofitable acquisitions offshore destroying shareholder value, albeit the new CEO is generally well regarded. QBE is not held in the focus portfolio due to our preference to predominately domestic general insurers given the attractive dynamics in the Australian general insurance sector.

Suncorp SUN 15.2 1.5 10% 5.0% 100% 7.2% 6% 3% 7% 5% -1%

Suncorp operates the 2nd largest general insurance business in Australia and New Zealand, and owns a 'sub-scale' regional bank. We are cautious towards regional banks at this point of the cycle. While the spin off of Suncorp Bank looks increasingly likely, which will improve the SUN's appeal in our view, the company's valuation has already re-rated and thus shed its 'congolomerate discount', leaving negligble valuation upside in our view.

ASX 100 - Insurance Brokers
Steadfast Group SDF 20.4 2.4 12% 3.2% 100% 4.6% 9% 8% 8% 8% 4%

SDF is one of the largest insurance brokers in Australia with a total of 425 brokers in the Steadfast Network enjoying the benefits of the Steadfast brand, purchasing power, IT systems, marketing and back office support. Steadfast acts as an intermediary between insurance companies and clients, providing a range of services to support its network primarily within Australia and New Zealand. As a broker, SDF is leveraged to the tailwinds of the insurance premium cycle without having any exposure to the tail risks (i.e. natural disasters) associated with underwritng policies.


*Diluted EPS in AUD terms, on a calendar year basis. Source: Refinitiv, Visible Alpha Consensus, Wilsons Advisory.

Steadfast Group – Leverage to the Hardening Cycle Without Perils Risk

Steadfast Group (SDF) is also held in the Focus Portfolio at a 2% weight. 

As an insurance broker, SDF benefits from the strong repricing tailwinds (i.e. by earning commissions on higher priced policies), however, without any exposure to the tail risks (i.e. natural disasters) associated with the general insurers. 

Our positive long-term view of SDF remains intact, underpinned by:

  • Organic growth – SDF is poised to deliver solid organic growth over the medium-term (high single digit EPS growth) driven by the premium hardening cycle and further growth in the size of its broker network. 
  • Roll up strategy – the company has a strong track record of acquiring businesses at EPS accretive transaction multiples and integrating them into its network. There is a long runway for inorganic growth both domestically and offshore – with the immediate focus being the US market following the acquisition of ISU Group last year. Over time we expect further M&A to drive incremental EPS growth that is not reflected in consensus expectations. 
  • Bid for PSC Insurance (PSI) suggests SDF is undervalued – The recent takeover bid for PSI has demonstrated the value in the domestic insurance broking sector and is set to leave just two players remaining on the ASX - SDF and its smaller peer, AUB Group.  This will likely result in existing PSI shareholders redeploying capital into SDF in our view.

    Moreover, the takeover offer implies a PE multiple of ~24.8x based on FY25 consensus earnings, which is a material premium to SDF’s current market valuation, at a FY25 PE of 20.4x.

    This points to attractive valuation upside for SDF. We note that putting SDF's FY25 consensus EPS on the PSI takeover multiple implies a value per share of $6.93 for SDF, which represents >20% upside to its current share price.
Figure 10: Steadfast is trading on an attractive discount to PSI's takeover multiple
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Written by

Greg Burke, Analyst

Greg is an experienced analyst in the Investment Strategy team. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.

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