Rising premiums are set to remain a positive for insurance companies for some time yet while business interruption claims uncertainty is still a cloud over the industry as legal battles continue and COVID-19 concerns persist, the latest earnings reporting season shows.

When it comes to the major insurers, QBE’s full-year result and half-year reports from Suncorp and IAG show the industry is still coming to grips with last year’s expensive natural catastrophes as well as impacts from previous years of low pricing, while the economic and business outlook is improving but uncertain.

“Premium rate rises are going to have to continue for these insurers to get back to making a respectable return on shareholders capital,” Morningstar analyst Nathan Zaia tells insuranceNEWS.com.au.

“They have been hit on multiple fronts from large natural hazard events, business interruption claims, rising reinsurance costs and falling investment income, so I think repricing is really the only viable option for generating a reasonable return again.”

QBE pre-released results in December warning of a $US1.5 billion ($1.9 billion) loss and a $US785 million ($1 billion) allowance for COVID-19 impacts. The loss compared with a year-earlier profit of $US550 million ($713 million).

IAG reported a $460 million loss for the half-year compared to a profit of $283 million, with the result affected by a pre-tax $1.15 billion expense for potential business interruption claims relating to COVID-19, which was flagged in November.

Suncorp posted net profit of $490 million, down 23.7% from a year-ago result that was inflated by divestment proceeds. The insurer said it had raised its business interruption provision to $214 million compared to a November figure of $195 million, although it appears less affected by potential claims than the other two companies.

Macquarie insurance equities analyst Andrew Buncombe says earlier market updates from insurers meant investors were looking more towards the guidance than at the numbers for the period just completed.

“What is interesting is IAG and Suncorp didn’t give new cost-out numbers and none of them gave margin guidance, which talks to how uncertain the outlook is,” he says. “That is ultimately the difficulty.”

The potential for further pandemic lockdowns remains a risk, while the economic recovery pathway likely faces some bumps as government support measures roll back this year.

S&P Global Ratings Director Insurance Ratings Craig Bennett says premium rates are a positive for insurers but volume growth in personal lines in particular has been muted, partly reflecting affordability constraints. Investment gains looking ahead may also be limited.

“I wouldn’t be expecting any big rebound, in terms of unit growth in particular,” he told insuranceNEWS.com.au. “There is continuing effort in relation to efficiency initiatives so we will see incremental benefits coming through there. Offsetting that, you probably have a higher investment in technology-type spend.”

S&P Director Financial Services Ratings Michael Vine says from a financial strength perspective the insurers are well positioned following recent capital and hybrid raisings, dividends for Suncorp and IAG were solid while the reserving for business interruption claims is likely conservative.

Nevertheless, it remains early days in assessing the final exposures to pandemic-related claims.

“There are a lot of actuarial assumptions on those business interruption reserves because there have been very few actual claims to date,” Mr Vine says.

Macquarie’s Andrew Buncombe says investors are likely to remain cautious while COVID-19 lingers and with court actions continuing after a first test case judgment on Quarantine Act wordings went against insurers.

“Investors look for absolutes and they want the business interruption issue completely done,” he says. “The reality is it is not going to be completely done for, let’s call it 18-24 months. That is why you are really seeing all three of the share prices struggle.”

Uncertainty for QBE includes a lengthy timeline in the recruitment of a new CEO following the departure of Pat Regan at the end of September last year, although the company is seen in safe hands with interim head Richard Pryce and with industry veteran Mike Wilkins chairing the group.

Mr Zaia says QBE’s North America business was an issue again this reporting season after being a regular underperformer in recent years.

“In a low cash rate environment, where the insurer can’t rely on investment income to offset poor insurance margins, improvement is urgently required,” he says.

“If pricing does not reflect the inherent risk of insuring in certain sectors or geographies, QBE should not shy away from selectively shrinking its footprint.”

The broking companies presented a positive picture in their half-year results and were buoyant about the full-year earnings outlooks as they benefitted from the stronger pricing environment.

AUB Group underlying net profit rose 44.2% to $30.7 million and the company lifted its financial year earnings forecast after seeing “strong momentum” in the first quarter.

Steadfast said it would deliver full-year earnings at the top of its guidance range and posted a 19.3% rise in underlying net profit to $60.4 million.

“We see opportunities for Steadfast to take more share of the intermediated insurance market, increase equity interests in brokers already within its network and benefit from premium rate increases,” Mr Zaia says.

COVID-19 was barely on the radar during the year-ago earnings season, and while brokers may feel impacts since then have not been as severe as feared at the height of lockdowns, it’s now an extra issue for insurers and the industry amid more conventional challenges.