Insurers’ share prices have taken a battering this year but analysts say the stocks’ popularity with investors will depend on how much the companies have to pay for reinsurance and whether higher costs can be passed onto policyholders.

IAG, Suncorp and QBE have underperformed the All Ordinaries Index for most of this year, while New Zealand-based Tower is down about 20% since January.

Although share prices have dropped when companies have announced profit downgrades and lowered guidance because of the rash of disaster claims, analysts who follow the sector do not see it falling out of favour over the longer term.

JP Morgan Insurance Analyst Siddharth Parameswaran told insuranceNEWS.com.au the share price falls are an accumulation of event costs and the fall across the sharemarket, which is down 10% since April on global uncertainty.

He says the outlook for insurers will depend on their reinsurance costs and how much of that they are able to recover by raising prices.

Insurers tend to be popular with investors looking for a capital security and a high dividend. On its current share price, QBE is paying a dividend of around 7.5% franked to 10%, while IAG is paying 3.9% fully franked and Suncorp 3.8% fully franked.

Morningstar Australia Insurance Analyst David Walker says investors are waiting to see how reinsurance costs impact on profits. Insurers will face not only higher premiums but also higher retentions.

“That is not necessarily a problem as long as the local general insurers can pass it on to policyholders,” he told insuranceNEWS.com.au.

Mr Walker says insurers do have pricing power in home and contents and motor, where he expects premium increases in at least high single digits as insurers attempt to recover claims costs. However, he notes pricing remains weak in commercial, particularly in the SME sector.

He says natural disasters might also encourage consumers towards the larger insurers, who will be seen as financially secure, well managed and able to pay claims quickly.

“Australians already tend to prefer the large heritage brands in financial services for their perceived security,” he said. “I think these disasters have really frightened people and that is going to make a large proportion of the market out there disposed to insuring with large brands.”