Tough growth ahead for insurance stocks

Premiums can't go any higher and people are letting their cover lapse – what's next?

Owen Raszkiewicz

Owen Raszkiewicz is a Motley Fool Contributor. Owen has been a Contributor since 2013, having also spent time as a Fool writer/analyst. He also worked as an Investment Analyst at Zenith Investment Partners, Australia's top research house specialising in managed funds. Owen has appeared on Channel 10's The Project and was invited on the BBC. He holds a Masters of Applied Finance, Masters of Financial Planning, Bachelor of Technology, Advanced Diploma of Financial Services and Diploma of Mortgage Broking Management. In addition, Owen has passed Level 1 of the Chartered Financial Analyst (CFA) Program. He has taken the Banking + Finance Oath (BFO). When he is not writing, Owen is Managing Director of Rask Finance, an Australian financial education company. You can email him: [email protected].

Published August 26, 2013 11:11 am AEST

Strong results from a continued rise in premiums enabled Insurance Australia Group (ASX: IAG) and Suncorp's (ASX: SUN) general insurance arm to post great results this reporting season. Despite posting good results, the two respective chiefs are at odds on the future growth of the insurance industry.

On the one hand, IAG boss Mike Wilkins is expecting softer growth ahead because businesses were choosing to take low-cost premiums with higher excess and many individuals were starting to let insurance policies lapse. The early signs of tougher economic conditions means both individuals and SME's were looking to cut costs and make trade-offs with expenses.

Suncorp chief executive Patrick Snowball said insurance premiums will rise by a "high single-digit" in the next year due to the reinsurance industry being particularly expensive in Australia because we have bigger houses in riskier places. In addition, under-insurance is another reason premiums will have to rise.

In the past 12 months, QBE Insurance (ASX: QBE) has not had the massive gains in share price as IAG and Suncorp but analysts are predicting it to perform well in coming years. With a large amount of international exposure, QBE has more long-term growth potential and, since it only draws 22.5% of revenues from Australia and New Zealand, a slow-down in the domestic economy will not hurt it as much as its ASX-listed peers.

Foolish takeaway

Insurance products can be hard to value and forecast, therefore they should be categorised as 'high risk' investments. At current prices QBE (ASX: QBE) and Suncorp are fairly valued. IAG pays a stellar dividend of 5.8% fully franked and is more modestly priced.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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