Insurance Sector Update

Here is an insurance sector update from Australian market analyst UBS.

Insurance Sector

108 profitability better, cost inflation up
Gross underwriting margins improving in personal lines:

The 5.2% pcp rate is the highest since mid-02, suggesting improving core profitability. This change measures the gap between per-unit premium growth and claims growth, and is akin to a per-unit gross margin for personal lines. The bulk of the insurance index covers comprehensive home and contents, comprehensive motor and CTP. Unfortunately, data for each of these product lines is not available.

Claims inflation on the rise:
Home: building and repair cost inflation has intensified, likely reflecting tight product and labour markets, with storm activity a probable driver. In contrast, furniture and appliance inflation remains subdued due to retailer competition and strong AUD. Motor: new vehicle inflation still muted on competition/AUD, but repairs and parts increasingly costly on labour costs and capacity constraints.

Profitability better, but will rates have to keep rising?:
The improvement in core profitability is a clear incremental positive for the sector, providing evidence that the industry's response to higher claims frequency has had the desired effect. However, should claims inflation remain elevated, or strengthen further, rates may need to continue rising to avoid future margin pressure.

Retain underweight GI sector view:
We are Restricted on IAG and QBE, but have a Neutral rating on SUN ($14.95 price target).