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Insurers' earnings withstand bushfire threat for now

Nathan Zaia  |  17 Jan 2020Text size  Decrease  Increase  |  
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The Insurance Council of Australia has reported that since September 2019, Australian insurers have handled almost 9000 claims from bushfire regions of NSW, Queensland, South Australia, and Victoria.

Estimated losses now exceed $700 million and we expect this figure to rise in coming weeks. The threat of further damage has not passed, and the cost of repairs is yet to be quantified.

No-moat-rated Insurance Australia Group (ASX: IAG) estimates natural peril claim costs for first-half fiscal 2020 will be $400 million, including more than $160 million related to bushfires.

As at 10 January 2020, IAG alone had received 5000 bushfire claims, 20 per cent of which it has finalised. While claims will rise, these fire events which began in December and continued into January will be covered by the reinsurance protection already triggered in first-half fiscal 2020.

The estimated natural peril claim costs equates to about 62 per cent of the fiscal 2020 full-year natural peril allowance of $641 million.

It is important to note that this is not the total cost of claims, but the cost to IAG after reinsurance recoveries, which shows the benefits of its reinsurance and quota share agreements.

Nor does this mean total bushfire exposure is capped as each fire event has a time limit which can vary from weeks to about a month. Given reinsurance cover is based on calendar years, net of quota share agreements, IAG retains the first $169 million of exposure to any large subsequent event in second-half fiscal 2020.

Given the severity of large peril events, we have increased our claims expense forecast by $140 million and our fiscal 2020 earnings forecasts fall around 4 per cent to $857 million. It appears likely the bushfires will be responsible for another significant claims event in the second half.

Our fair value estimate of $6.50 per share is maintained given longer-term forecasts are unchanged. IAG is trading at about a 20 per cent premium to our fair value estimate.

Suncorp’s reinsurance shelter

Since September 2019, Australia’s second-largest insurer, Suncorp (ASX: SUN), has received more than 2600 bushfire-related claims, with a net cost to the insurer between $315 million and $345 million.

Including bushfires in early January, total natural hazard costs for the fiscal year to date are about $619 million.

This is about 76 per cent of the insurer’s annual natural hazard allowance of $820 million. Fortunately, reinsurance protects Suncorp from the cost of current fires rising further. However, new fire events will incur additional costs.

a NSW Rural Fire Service operator in the field

 IAG and Suncorp have received almost 8000 bushfire-related claims

While no-moat-rated Suncorp seemingly faces natural hazard costs in excess of the $849 million recorded in fiscal 2019, its more extensive reinsurance program could yet prevent this from occurring.

For fiscal 2020, Suncorp acquired Aggregate Stop-loss protection which provides an additional $200 million of cover for all natural hazard losses in excess of its $820 million allowance. It also has an aggregate protection cover of $300 million.

This provides protection for large events above $10 million once the aggregate of large peril costs reaches $515 million. This seems likely to be triggered given large natural hazard costs currently stand at about $465 million.

While the severe threat of bushfires is ongoing, earnings appear adequately protected for now. We make no changes to our $13.50 fair value estimate or forecasts and believe Suncorp remains fairly valued.

Equally disastrous events, or multiple smaller natural hazard events, remain a risk to earnings in the second half. While these events could put pressure on reinsurance costs in the future, we believe any meaningful increase should be offset by premium increases in following years.

 

is a Morningstar equity analyst, covering the banking and insurance sectors.

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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