Reactions to the full and half-year profit results of Australia’s major listed insurers have been mixed, to say the least.

Shares in both IAG and Suncorp closed higher last week after they announced their full-year figures, up 1.8% and 0.7% respectively.

But QBE closed down 4.5% after its half-year announcement, although the stock has since recovered much of that lost ground.

The views of investment analysts about which company has fared best out of the reporting season vary, with Credit Suisse analyst John Heagerty plumping for IAG and Deutsche Bank analyst Shreyas Patel and Merrill Lynch’s Andrew Kearnan favouring Suncorp.

None of the insurance analysts follow Wesfarmers, which is covered as a diversified industrial stock.

While the businesses each have different geographical footprints and market drivers, a comparison of some of the key ratios is telling. Suncorp finished 2011/12 with a combined operating ratio (COR) of 103%, compared to IAG’s 101.2%.

Both companies suffered at the hands of a range of local catastrophes, including Melbourne’s Christmas Day hailstorm and flooding in Queensland, NSW and Victoria.

These events failed to reach the required claims levels for reinsurance covers to pay out in any significant way, and had the cumulative effect of blowing both insurers’ catastrophe budgets for the year. The CORs of Suncorp and IAG were worse than their 2010/11 results, despite the much bigger catastrophes of that year.

As a consequence, Suncorp has increased its catastrophe budget by 12% for the next financial year and IAG has upped its by 10%.

As previously revealed to the market, Suncorp has taken the additional step of entering into a multi-year, quota-share arrangement for 30% of its Queensland home insurance book, which is recognition of the group’s skewed exposure to the state.

The jury is still out on whether this is a fortuitous move, with Deutsche Bank’s Mr Patel telling insuranceNEWS.com.au that if Queensland is hit by a series of catastrophes in the coming years Suncorp management may look like “geniuses”.

But if the Queensland cats fail to eventuate, Suncorp “will have given away premium at a time when cats were normalising and price increases were coming through”.

Insurance profit margins are seen as a key measure of profitability, and Suncorp achieved an underlying insurance profit margin of 12.1% for the year, compared to IAG’s 10.6%.

Differing accounting procedures and adjustments mean the two figures are not directly comparable, but Mr Patel says that on a like-for-like analysis of the insurance profit margins, “Suncorp is a nose in front at the moment”.

But Credit Suisse’s Mr Heagerty told insuranceNEWS.com.au that IAG’s results show the most upside potential, due to “surprisingly strong” gross written premium growth, particularly in its motor book.

“They are really going for volume growth,” he said, adding that he has raised his forecasts for IAG as a consequence.

CGU continues to provide a drag on IAG’s momentum, and Merrill Lynch’s Mr Kearnan says in a note to clients he is “surprised” the market has seemed to look through the underperformance of CGU.

IAG’s UK business is another black spot, with the group writing down goodwill associated with the business. Mr Heagerty reads this as yet another sign that the sale of the business is imminent.

He also points out that IAG’s foray into Asia still holds the potential for a lot of upside, describing it as “tracking pretty well”.

Compared to its Australia-focused peers, QBE’s first-half COR figure of 92.9% looks strong, as does its insurance profit margin of 13%. But as Mr Patel points out, as a predominantly commercial specialty insurer its profit margins should be higher than those of IAG or Suncorp.

On the downside, QBE missed its forecast insurance profit margin of 14% and lowered expectations for the second half of the year from a margin of more than 13% down to a margin of more than 12%. This has eroded market confidence in its outlook.

In a scathing note to clients, Mr Kearnan says QBE failed to communicate before the results that it was likely to miss its targets. As a result, “the market feels like it has been misled”.

“For the past three years QBE has missed their own financial guidance and the hope was in this period with so many factors in their favour the company would finally return to bettering guidance and forecasts,” he says. “With a change in CEO it was an absolute must.

“Investors will not likely be in a hurry to own QBE until they can restore confidence over multiple periods.”

Mr Heagerty told insuranceNEWS.com.au that for those already bearish about QBE, “this result is proof of the argument”. 

But he notes the latest half-year result is not as disappointing at the past few have been, and argues that in lowering expectations new CEO John Neal could be  “leaving himself some room for a better than expected second-half result”.