The past few years haven't been a good time to be a property insurer in Queensland.
In between cyclone Yasi, the Brisbane floods, and now cyclone Marcia, claims have cost home and contents insurers a couple of billion dollars.
The ASX's major insurers have been updating the market in the past few days with their expectations of damage from the latest cyclonic event to hit the Queensland coast.
Suncorp Group Ltd (ASX: SUN) told investors on Friday that, thanks to reinsurance programs, the absolute maximum its insurance businesses – which include Suncorp, AAMI, Apia, GIO and Vero – would have to pay in claims was $200 million (pre-tax).
Fellow insurer Insurance Australia Group Ltd (ASX: IAG) informed the market this morning that it had received over 700 claims as of Sunday 22 February, with more expected in the next few days as people move back into their homes and businesses.
Based on figures released to the market and the scope of the devastation, it seems likely that IAG might see a hit to its income this financial year.
The group's 'natural peril allowance' (money set aside to cover claims) for 2015 is $700 million, of which $421 million has already been used in the six months to 31 December 2014.
IAG also has reinsurance protection of $250 million to cover property catastrophe, and a further $150 million insurance which will become available if claims should exceed the group's $700m natural peril allowance.
Much will depend on the size of the claims received, and while it looks as though IAG might exceed its $700m natural peril allowance this year, it is difficult to establish whether the company will have to find additional cash to cover costs or not.
With shares in both IAG and Suncorp declining in the wake of the disaster, I think that investors have an opportunity to buy in at discounted rates.
This seems like the perfect time to remind readers that insurance by definition exists to turn a profit by covering catastrophes. Of course, sometimes a catastrophe will actually occur and companies will have to pay up.
Generally though insurance premiums price in the likelihood of claims (though pricing risk is a tricky business) and insurers' aim to keep the rest as earnings for shareholders.
Both IAG and Suncorp have delivered strong performance in recent years despite past catastrophes, and I expect 2015 to be no different. With both shares offering greater than 6% yields at present prices (this will depend on the earnings impact of claims though), and having high-demand products and market scale that offers competitive advantages, I expect both companies will return to form quite soon.
One thing I do hope we don't see is another panic induced mass repricing of insurance products like happened in 2013, because that's the last thing either insurers or consumers really need.
