Earthquakes boost insurers' profits

17:00, Aug 03 2013
RIP OFF: Is the reinsurance story providing cover for the increased profitability of general insurance?

Australian boasting can be annoying, but when they are crowing about how profitable their insurance businesses have become in New Zealand it becomes hard to swallow.

While customers have had to stomach rapid increases in premiums since the Christchurch earthquakes and other disasters, our Australian-owned insurers appear to be making hay.

IAG chief executive Mike Wilkins told shareholders in April to expect "strong profitability" in New Zealand.

He said gross written premiums earned by its New Zealand brands State, NZI and AMI, bought in 2001, 2003 and 2012 respectively, gave the group a 40 per cent market share and contributed 17 per cent of IAG's total premiums.

For its part Suncorp has told its investors that profits of more than $100 million were now possible, even taking "earthquake impacts" into account.

Suncorp investors were also told to expect growth of 7 per cent to 9 per cent in the next two years - compared to sluggish GDP of perhaps 3 per cent.


Suncorp claims a market share of 19 per cent through Vero, with an additional 5 per cent through providing the insurance behind the AA Insurance brand.

New Zealand's general insurance market is dominated by the brands owned by the Australian Securities Exchange-listed pair, which have been buying up Kiwi insurers for a decade or more to accumulate a combined market share of 65 per cent.

In Australia, Suncorp and IAG have what equity analyst Morningstar described as a "profitable duopoly" over the general insurance market, but recent communications with investors have emphasised the increasing profitability of their New Zealand operations.

And yet the impression the industry has given to customers here is that premium rises are the result of reinsurance costs sky-rocketing since the Christchurch earthquakes.

When asked about the statements, one prominent fund manager with investments in insurance companies told the Sunday Star-Times: "The best time to own a general insurer is after a catastrophe."

The share prices of Suncorp and IAG appear to confirm that. IAG shares have risen from A$3.75 in late 2010 to around A$5.80, while Suncorp's have gone from trading between A$7 and A$8 in 2010 to over A$12.

With so much bad news about, policyholders are amenable to premium increases, the fund manager said. The reinsurance story provides good cover for a one-off opportunity for a step change in the profitability of general insurance.

"They put their rates up.

Households are accepting because there is a lot of bad news and a lot of red ink," he said.

It is hard to tell what is happening from the 2011/12 financial statements because of the massive rump of earthquake claims distorting them, but hints are coming from IAG's guidance for shareholders.

For IAG, the earthquakes have resulted in New Zealand becoming a far bigger part of its operations, with higher premiums having lifted the NZ business's share of total gross written premium to 17 per cent or $1.9 billion (annualised for the first half of 2013) from 14 per cent in 2010, when premiums were $1.2b.

But it also revealed that reinsurance costs rose from 8 per cent of gross written premium in the full year 2010, to 15 per cent in the first half of 2013 (annualised).

Across their whole book of insurance - which includes things like house, car, boat and commercial - that equates to a rise from 15 cents in the dollar of premium that goes to the insurer from 8c. That is not enough to explain the dramatic rises in house insurance premiums passed through to customers. Other factors are at work.

Earthquake Commission levies have risen, and GST magnifies any rise in the premium collected. But in the confusion some price-resetting is happening, though how much is hard to say.

As well as the usual things taken into account when calculating premiums for house cover (risk associated with the individual property, the claims history of the policyholder, the excess, plus any exclusions), there is some clawing back earthquake losses, Vero spokesman Ron Burke said.

That belies the idea the cost of insurance today is solely related to future risks. "There are also general factors," he said. "They would include recovery of some of the unexpected claims costs experienced after a natural disaster such as an earthquake."

And, yes, there has been a move to up profits through price rises.

"Insurers can increase their profits by raising prices - as any other business. They can also do it by becoming more efficient and reducing their operating costs. Once again - both factors are influencing the Suncorp Group and Vero results," Burke said.

The Christchurch earthquakes have demonstrated, the public has been told, that New Zealand was getting insurance too cheaply, for too long. The pendulum has swung back, and only the insurers' future profits will show if their new pricing for risk is too tough.

Both Suncorp and IAG will report their 2012/13 full year's profit later this month.

Certainly, Tim Grafton, head of the Insurance Council of New Zealand, said insurers are more careful assessing risk now, just as the reinsurers were, and that was contributing to premium rises.

But he said the New Zealand market had fiercer competition than the Australian market.

The bad news for households, said Grafton, is that there are more rises on the way as the Reserve Bank demands insurers have more capital. Returns have to be higher to compensate the owners of that capital.

High bank profits have long been justified by saying that it is the price a small nation pays for a stable financial system. The same is said of the insurance industry.

"New Zealand has efficient, profitable insurers who manage risks and capital well," said Burke. "New Zealand has also had the experience of an inefficient insurer that did not manage risks or capital well. Who suffered from that? First the people who had claims with the insurer [AMI]; then the New Zealand taxpayer who was not associated in anyway with AMI - but still had - through the Government, to meet the costs of the failure and the costs of the claims being managed by that insurer. So given a choice - I suggest that New Zealand would choose profitable insurers who can meet customer claims and contribute to Government taxes - not deplete them."

Sunday Star Times