Which ASX insurer is better for your portfolio?

The huge interest rate hiking cycle, which started in 2022, has proven to be a tailwind for a few businesses, but perhaps none more so than the insurers. While higher inflation has increased costs, insurance firms can pass on those increased costs through higher premiums. They then also enjoy the benefit of higher returns when they invest those premiums.  

That fact was made extremely apparent as two of the Big Three insurers reported their results this week—IAG (ASX: IAG) and Suncorp (ASX: SUN). Both reported a huge increase in profits (+7.9% and +11.8%, respectively) and a double-digit increase in premiums (+11% and +14%, respectively), while their investment income businesses benefited from buoyant share and fixed-income markets.

But, as with anything insurance-related, investors always need to watch the economic and weather cycles. One bad cyclone or bushfire season, a material slump in financial markets, or a material cut in interest rates can quickly turn these good times into forgettable ones. 

I sat down this week with Adam Dawes, Senior Investment Adviser at Shaw and Partners, to discuss the major insurance company results, risks, outlooks, and valuations. 

IAG FY24 Key Results 

• NPAT +7.9% year-over-year to $898 million
• Gross written premium growth +11.3% to $16.4 billion
• Investment income +35% to $286 million
• Insurance profit +79% to $1.44 billion
• Reported margin +6% to 15.6%
• Final, 50% franked dividend of 17c/share (full-year payout of 27c/share)

SUN FY24 Key Results

• NPAT +11.8% to $1.197 billion
• Gross written premium growth +13.9% to $14.1 billion
• Investment income +46.6% to $661 million
• Reported margin +0.5% to 11.1% (Full year result)
• Completed its Bank sale to ANZ for $4.1 billion, most of it will be returned to shareholders
• Final, fully franked dividend of 44c/share (full-year payout of 78c/share)

Related content around the Suncorp Result:

• CEO Interview
• Earnings Call Highlights

In one sentence, what were the key takeaways from these results?

Dawes: I think both results were generally in line with their expectations. I think Suncorp was slightly below expectations while IAG reported generally in line. Net-net, it was probably a decent result for the insurance businesses. You don't want to exceed expectations too much. 

Were there any major surprises in these results that you think investors should be aware of?

Dawes: I think the biggest surprise that I saw, and especially with IAG and Suncorp, was that they both talked about higher costs. With IAG, if you needed to get your roof fixed or with Suncorp if you needed to get a new windscreen on your car, the contractors were charging 20% more than they were previously. The builders and their contractors are doing that.

On top of that, the costs of goods have also gone up about 10% this year. So you're really seeing some of these businesses, especially with IAG and Suncorp, they're going to have to increase premiums again next year to cover for all the excess costs that they're having to soak up regularly as well. 

I thought we might have seen some cost reduction, but it doesn't look like most of them are taking that on the chin. Hence, [we'll see] higher premiums next year on the back of that.

Would you buy, hold or sell either of these stocks on the back of these results?

IAG: HOLD

Suncorp: BUY

Dawes: I think Suncorp sits a little bit ahead for me. One reason is because of that capital management strategy that's going to go through. Once they complete the sale of the banking operation, there is going to be a little bit of extra cash sitting there that they're going to have to return to shareholders and do buybacks.

If you're looking at a robust capital position, I think Suncorp sits probably a little bit better. I've always liked Suncorp for the bank and the insurance side. It has that diversification. But once you take that bank out, then obviously it's just an insurance company. But on that capital management side of things, I think it gets a little bit of a nose in front of IAG.

We're cautiously optimistic towards IAG, but they do have a solid capital position and they do have some strategic initiatives that are going through, but it does trade at a little bit more of a premium valuation going forward.

On the broker side, there's 42% of the markets on a BUY, 58% are a HOLD, and no SELLS on IAG. Suncorp has about 58% of analysts are a BUY, 42% on a HOLD, and zero on the SELL. It's a line ball for both of those companies.

What’s your outlook on the sector over the year ahead? Are there any risks to this sector that investors should be aware of?

Dawes: I think you have got higher costs coming through, but in saying that premiums are going to go up again, and that's where you want to be - in a business that is in earnings upgrades or premium upgrade cycles. QBE (ASX: QBE) has been the other one that has made a lot of money on higher interest rates and that's really propelled their share price.

On the flip side to that, potentially interest rates in the US are going to start to come down and here in Australia, it might take a little bit longer but midway through next year, we might start to see interest rates coming down.

I don't know if you want to be owning insurance companies with interest rates starting to go down. You want to own insurance companies as interest rates are moving higher. There are some headwinds in the insurance sector next year. Potentially, you might want to lighten the load a little bit if interest rates do come down quite quickly in the US.

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now?

Rating: 3-3.5

Dawes: Over the 8000 mark, I'd probably say we're at about 3-3.5. Overall, markets still have a little ways to go. The banks have done all the heavy lifting over the last three to six months. We're starting to see some cycling out of the banks into the resources. Then, if the resources can start to move higher and the banks stay where they are, potentially we might see another leg up from here.

I'm still pretty positive about next year and the market more broadly, given interest rate cuts are moving through the market. But I'm not going to say it's looking cheap. We've got a little bit more room to move on the upside, but it's certainly not cheap at any metric that you look at.