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Insurers 'well placed to outperform' in current economic climate: asset manager

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Australia’s three listed insurers – IAG, QBE and Suncorp – remain “attractive” investment targets against the backdrop of rising interest rates, energy price spikes and higher inflation, according to Tyndall Asset Management.

Portfolio Manager Malcolm Whitten says the trio are “well placed to outperform” despite a softening in economic growth and heightened fears that the current environment would lead to a recession.

He says the insurance sector is one of a handful that benefits from higher interest rates, with a 1% increase in rates equating to about a 10-20% upside in earnings.

Insurers generally benefit when interest rates rise as they invest premiums in a mixture of cash and bonds, and possibly a small proportion in shares and other assets.

“One of the things that makes the insurance sector unique is that premiums are billed and collected up-front, delivering in a premium float before claims are paid,” Mr Whitten says.

“The float is usually large and is invested to generate additional returns on top of an underwriting margin.

“Insurance companies aim to make an insurance margin which includes a return on the float that is akin to a leveraged investment return, since the return is earned on the premium float.”

According to Mr Whitten, insurance stocks are under-valued despite the recent increase in the frequency of disasters and associated claims weighing on investor sentiment.

He says valuing insurance companies remains difficult due to the potential mismatch of estimated claims verses actual claims paid which may take years to finalise.

There are concerns that estimated losses and exposure protection limits would be exceeded but he says “to date, the measures in place have provided adequate protection”.

“The valuation, dividend profile, and sensitivity to rates, inflation, and the risk of stagflation leave IAG, QBE, and Suncorp well placed to outperform,” Mr Whitten says.