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Commercial outlook less gloomy in latest profit reports

Gloomy market commentary has been a feature of insurer’s earnings reports in recent times, but the latest profit-reporting season last month insurers revealed a slightly better picture.

Positive signs have emerged in the commercial sector, where surplus capacity and strong competition have weighed down premiums, while personal lines also posted gains.

“The insurance price cycle is turning up for commercial insurance lines after three or four years of declining,” Morningstar insurance David Ellis says.

“The consumer businesses have benefitted from pretty positive price increases, particularly in CTP policies in NSW.”

IAG’s gross written premium (GWP) grew 4.7% to $5.8 billion in the six months to December 31, reflecting rate rises driven by higher claims costs in personal lines, plus improved commercial pricing. The group raised fiscal year GWP guidance to low single-digit growth, up from a relatively flat prediction previously.

At QBE, headline GWP fell 5% in calendar 2016, while the group delivered 1% underlying growth, a reported 0.1% rate reduction on renewing business was an improvement compared to a 1.3% rate reduction the previous year.

It was a more positive recovery story in Australia for QBE, where premium rates declined 0.8% in the first quarter but turned around to an increase of 4.5% in the final three months. The company says the momentum continued in January.

“Despite the weakness in pricing in the past year, the outlook for pricing is showing signs of improvement,” Deutsche research analyst Ross Curran says in a report.

The US market is pointing to a slight uptick, while commentary from IAG and Suncorp also suggests commercial pricing trends have found a bottom in the local market, Mr Curran says.

Suncorp’s GWP rose 6.2%, with CTP jumping 27.3% largely due to the company entering the SA market. Commercial lines increased 0.4%.

The Brisbane-based insurer says the consumer and commercial portfolios expect low single-digit GWP growth, and warns CTP is likely to be affected by the ongoing government and regulator focus on the operation of the scheme.

JP Morgan estimates Suncorp achieved commercial rates gains of 0.5% in the past half – not a large gain, but an improvement over the second half of last financial year and the 1% decline in the first half of the 2016 financial year.

But any optimism that the worst is behind the market is tempered with large doses of caution. JP Morgan analysts say while there have been signs of a positive shift in the commercial cycle, they are yet to see a “meaningful turn” in premium rates.

Steadfast, Australia’s largest broking company, points to a “small degree of price improvement” in the small to medium enterprise sector, where it has a significant customer base.

The company included an SME insurance cycle clock in its results presentation that showed the market has moved past the “insurer realisation of losses” point near the bottom of the cycle to “rates start to rise”. It’s still a fair distance from the top of the cycle, where strong profits are followed by “capital flows into market”.

Steadfast isn’t yet banking gains from expected premium rises in its forward outlook for this financial year.

“The reality is when you change from a soft to a flat to a hard market, it sometimes can take six months to reach fruition,” MD and CEO Robert Kelly told a results briefing, while noting it can take more time for improvements to reach the bottom line.

AUB Group sees the rate environment as still highly variable but it has nevertheless recorded an average 1-2% increase across its portfolio.

It’s a gentle rise, and somewhat fragile. Insurers will be hoping any improvement in their insurance performance on the premium side isn’t derailed by natural catastrophes.

The Kaikoura earthquake in New Zealand, storms in SA and Victoria and hail in NSW have been among the major events since mid-2016, but it has been a relatively quiet summer for Australian bushfires and cyclones

Nevertheless, in the wake of Sydney’s February hailstorms, Suncorp said in an update that total natural hazard claims costs for the eight months to February 28 are estimated to be between $610-$630 million. Mr Ellis says the budgeted allowance for the year is $620 million.

IAG’s financial year to date costs from natural perils were estimated to be around $650 million after the NSW hailstorm, compared to an allowance of $680 million. It says a fiscal 2017-specific natural perils cover of $96 million effectively extends the allowance to $776 million.

Overall, there is still plenty of caution about whether the more positive tone on premium pricing will lead to more substantial increases this year.

“We are a long way from a traditional hardening market,” Morgan Stanley Australian Insurers and Diversified Financials analyst Dan Toohey says. “But price action in key underperforming lines is positive, with the SME segment most encouraging,”

QBE CEO John Neal has warned of a flat outlook for premiums across the wider group, but Australia is a bright spot.

“There will always be variations market by market and while we believe price increases in Australia will be maintained, elsewhere we expect pricing to be broadly flat,” he said.

Forecasts for improving rates have turned out to be false dawns in the past. This time around insurers will be hoping the signs of improving prospects, particularly in commercial lines, will gain momentum.

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