ASX insurance shares are rising in 2023 as the big general insurers raise premiums by 10% to 20%, according to the Australian Financial Review (AFR).
That’s despite annual inflation in Australia peaking at 8.4% in December and declining to 5.6% in May.
This sort of pricing power, coupled with no change to competition between insurers, and improving investment income from bonds, makes ASX insurance shares an appealing investment nowadays.
In fact, fund managers are currently seeing insurance stocks as their preferred ASX financial sector exposure right now — ahead of the ASX 200 bank shares.
As we reported today, the fundies are switching positions as we speak.
Let’s compare ASX insurance shares with other stocks in 2023
So, here’s what’s happening with the big ASX insurance shares in 2023.
In the year to date:
- The Insurance Australia Group Ltd (ASX: IAG) share price has gone up 23%
- The QBE Insurance Group Ltd (ASX: QBE) share price has gone up 14%
- The Suncorp Group Ltd (ASX: SUN) share price has gone up 13%.
Let’s compare that to bank stocks:
- The Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price is up 6.1%
- The Commonwealth Bank of Australia (ASX: CBA) share price is down 1.3%
- The National Australia Bank Ltd (ASX: NAB) share price is down 8.3%
- The Westpac Banking Corp (ASX: WBC) share price is down 5.4%.
And how about the rest of the market?
The S&P/ASX 200 Index (ASX: XJO) is up 5.2% in 2023, so insurance shares are outpacing ASX 200 stocks by more than 2:1.
If we compare the performance of ASX insurance shares to consumer staples shares, which are often considered the most resilient sector during high inflation, insurance shares are outperforming there, too.
The S&P/ASX 200 Consumer Staples Index (ASX: XSJ) is up 7.1% in the year to date.
What’s happening with premiums?
In an inflationary economy, the ASX shares with the most resilience are typically those that have pricing power.
This means they can raise their prices and not lose customers because their products are deemed essential (like groceries) or at least highly valued (like insurance).
The AFR quotes data from Macquarie showing home insurance premiums were up 10.9% for new business in the June quarter year-over-year.
Small business insurance premiums were up 14.4% — the highest on record — and CTP insurance premiums were up 3.2%.
Analysis by KPMG also confirms that gross written premiums surged by 10.2% in the 12 months to March 2023, as reported in The Australian.
This gels with IAG’s recent announcement that it expects to achieve 10% gross written premium growth in FY23.
KPMG insurance partner Scott Guse says customers may face a further 10% rise in the coming year.
Guse said: “I can’t see any change in premium increases – the current trend will only continue.”
The AFR reports that in addition to rising premiums, the insurers have seen no change to competition levels in their sector and no major insurance events in recent times, which means no big payouts.
Plus, they’re raking in extra investment income. Insurance companies typically invest spare cash from the premiums customers pay into bonds, and bond yields are improving).
Should you buy ASX insurance shares?
Let’s canvas the latest views of a few brokers.
Top broker Goldman Sachs prefers Suncorp shares to IAG shares, as my Fool colleague James reports.
Its analysts have a neutral rating on IAG shares with a 12-month share price target of $5.29.
The IAG share price closed at $5.74 on Friday, so this implies downside risk in FY24.
Goldman has a buy rating on Suncorp shares and a 12-month share price target of $14.53.
The Suncorp share price closed at $13.69 on Friday, so this implies a potential upside of 6.1% in FY24.
The broker explains its views of these two ASX insurance shares:
IAG is one of Australia’s largest Personal and Commercial insurance companies. We are Neutral on IAG on a relative basis.
IAG is slightly more expensive than SUN and there is less upside to our TP.
We like IAG because 1) Rate cycle is strong across both personal and commercial in Australia. 2) IAG is targeting substantial earnings improvement on its Intermediated Insurance business. 3) Operating leverage on its expense ratio from largely rate driven strong top line growth. 4) IAG has capital flexibility noting possible redundancy in its reserving position with respect to business interruption. 5) Yield curve benefits.
However, we are concerned about 1) Volume loss in response to rate increases. 2) Sufficiency of FY23 perils allowance. 3) Continuing non QS reinsurance cost pressures.
Morgans also likes Suncorp shares due to the company’s efficiency program and attractive valuation.
It has a buy rating and a 12-month share price target of $14.44 on Suncorp.
The broker also anticipates an improved dividend yield of 5.7% in FY24 and 6.4% in FY25.
Morgans also has an add rating on QBE shares and a 12-month price target of $16.10.
The QBE share price closed at $14.99 on Friday.
