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New season, same climate

There’s little joy to be gained from market conditions for Australia’s three major listed insurers, and the latest earnings-season reports suggest they will be battling headwinds for a while yet.

Subdued premium growth and sliding interest rates hit profit results, and there is not yet sufficient clarity to say whether weak markets have bottomed out.

“Pricing competition was tough in Australia [in the 2015/16 financial year], particularly in commercial markets, and we saw that affecting IAG, Suncorp and QBE,” Morningstar analyst David Ellis says.

Nevertheless, the companies have strong capital positions, are pursing efficiencies and cutting costs, and have held their nerve as they position to drive future growth when conditions improve.

S&P Global Ratings has maintained its ratings and outlooks on the companies following their results.

“We felt the underlying performance of the three was generally solid, despite quite trying conditions,” S&P analyst Mark Legge told insuranceNEWS.com.au.

The insurers are also maintaining discipline on premiums and seeking to obtain increases where possible, rather than chasing market share.

They are also working to prudent investment strategies despite sliding returns as they battle record low interest rates and the possibility of the Reserve Bank making further cuts.

“We are not seeing any of these players react to that challenge by markedly increasing the level of high-risk assets they invest in,” Mr Legge said. “We are comforted that all these players are keeping quite conservative investment portfolios.”

Suncorp, the first of the big three to report, says its general insurance net profit declined 17.5% to $624 million last financial year. Investment income on insurance funds dropped 36% and gross written premium (GWP) gained 1.8%, while natural claims hazards were $60 million above allowance after the east coast low.

IAG’s net profit fell 14.1% to $625 million after investment returns on shareholder funds dropped. The company, which announced a quota-share arrangement with Berkshire Hathaway last year, says insurance profits grew 6.8% and GWP eased 0.6%. It will return $300 million to investors via a share buyback.

“The tie-up with Berkshire Hathaway is benefitting IAG’s return on equity, its insurance margin, reducing volatility in its earnings and enabling it to generate surplus capital, which it is returning to shareholders,” Mr Ellis said.

Global insurer QBE’s shares took a tumble after it released half-year results and slightly eased its full-year GWP guidance.

Statutory profit took a hit as weaker interest rates led to a $US283 million ($364 million) claims liabilities impact. The Sydney-based company has removed its Australian and New Zealand head as it pursues action to improve performance. Nevertheless, it still increased the interim dividend.

“Following an upbeat strategy day in May, QBE surprised with a more subdued to-line outlook, higher dependence on reserve releases to support the underlying outlook and unexpectedly higher attritional losses in Australia,” Morgan Stanley analysts led by Daniel Toohey say in a research note.

The analysts say QBE’s balance sheet is robust and margins are in line to grow next year.

“The insurance and yield cycle remains tough, but downside risk from here looks limited,” they say.

However, JP Morgan has downgraded its rating on QBE to “underweight” from “neutral”, even as the insurer pursues plans to improve its performance.

“Expense initiatives have historically not been effective and claim savings may be difficult to achieve,” analyst Siddharth Parameswaran says in a research report. “As a global commercial insurer, QBE is subject to the vagaries of the insurance cycle. Trends in the cycle are currently unfavourable, providing headwinds for significant earnings growth.”

Despite the negatives, there is some optimism the market may be poised to turn.

Another positive for primary insurers is the potential benefit of abundant reinsurance capacity, keeping rates down and providing the potential for improved terms and conditions.

It’s likely to remain a tough market for some time yet, though, with insurers facing continued pressure to improve their businesses, cut costs and shore up margins.

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