Analysts at BofA Securities are forecasting a multi-year pricing cycle for Australian personal lines insurers, which will be primarily driven by concerns surrounding the impacts of climate change and rising peril exposures.
The firm highlighted how climate change inflation is already evident in Australian insurance results, with insured peril loss inflation outpacing economic and insurance premium growth.
“We see this as a key concern, and not observable elsewhere in the world. In order to build longer-term investor confidence, we see the stabilisation of peril loss ratios as key. One easy way to do this could be through higher premiums, which we think need to grow in-line with exposures,” BofA Securities explained.
Switching attention over to Australia’s property and casualty (P&C) segment, analysts are anticipating to see an attractive earnings outlook for the sector overall.
In fact, BofA Securities stated that it believes the sector can deliver ROTEs of 27% over FY25-27E, supported by highly quality underwriting and investment income earnings. Underwriting trends also remain favourable, underpinned by pricing-driven growth and margin expansion. Analysts stated that lower reinvestment yields also point towards a more normalised investment outlook.
Overall, BofA Securities estimates that the insurers can deliver around 9-10% EPS/DPS CAGR over FY24-27E.
Furthermore, analysts pointed out how Australian general insurers are strongly capitalised, and how the firm sees an attractive outlook for yields over the coming years.
“Excluding SUN’s expected return of bank sale proceeds (~17% of SUN’s market cap), we estimate insurers are on track to return 17% of market cap to shareholders over the next three years. This equates to an attractive annual yield of 5-6% (4.5% in regular dividends supplemented by 1.0% in buybacks), which are comparable to yields offered by the Australian banks (5.2%),” analysts explained.
Interestingly, while year-on-year price changes should begin to slow, BofA still expect to see insurance premiums rise in the high single digits over the coming year, which is being driven by a range of factors, including upward pressure from rising peril losses (climate change).
BofA Securities also stated that reinsurance is a key driver of higher claims costs for property insurers.
As heavy purchasers of reinsurance, Australian property insurers have felt the brunt of the hard market since mid-2022, feeding into significant primary insurance price increases.
According to analysts, the global reinsurance outlook appears to be stable (but not yet softening), however, the firm believes that ongoing discipline on price and structure is likely to take place.
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