A new report from Morgan Stanley states that Australian insurers IAG and Suncorp are now likely to exceed their catastrophe budgets for 2021 by a modest amount, after it was announced that the country has so far been inflicted with flood losses of $438 million.
Source: EPA
As of this morning, 29,213 insurance claims have been received following devastating flood events across the east and southeast of the country.
Analysts point out that while this could be considered a good outcome given a storm-prone La Nina season, it’s important to note that both insurers have consistently missed their cat budgets over the past few years.
This means higher earnings volatility and likely leads to higher reinsurance costs.
Following the Sydney heavy rains, IAG has reported that it is likely to exceed its cat budget, and Morgan Stanley think SUN could too.
IAG has on average exceeded its cat budget by more than SUN has since 2016, and analysts think it may have to increase its cat budget by more than its rival in 2022, which is noted as a headwind to underlying margins.
For IAG, SUN and QBE, reducing volatility of earnings is considered key to re-rating. Aside from catastrophes, analysts state the other issue overhanging insurers is COVID losses. Among the insurers, the report says SUN has the best prospects for near-term return of capital.
All else being equal, analysts say a 5% increase in group reinsurance costs with no offsets in lower costs/claims would result in SUN’s insurance margin falling by 0.7%, while insurance profit would fall by 8% and group cash earnings would fall by 4%.
IAG’s insurance margin would fall by 0.6%, while insurance profit and cash earnings would both fall by 4%. This excludes any changes in the 32.5% group quota-share reinsurance.
