It has been a very positive period for ASX insurance shares with profit soaring in FY23 according to the latest statistics.
The Australian Prudential Regulation Authority (APRA) recently released its update for June 2023. It detailed some numbers from the sector.
Sector highlights
APRA revealed that for the year ended 30 June 2023, the sector's net profit after tax (NPAT) increased 408% to $4.6 billion.
This was driven by a recovery of investment returns, which came to $3 billion overall. Insurance companies have a pool of insurance premium money that's invested to make returns until the money is needed to cover claims. When the investment portfolio makes positive returns, it is a contribution to net profit while negative investment returns hurt net profit.
While net profit saw a big increase, the actual underwriting (insurance operations) profit for the sector declined 6.3% to $5.7 billion over FY23. The net earned premium rose 10.3% to $46.5 billion, while the net incurred claims worsened by 16.1% to $30.3 billion.
APRA explained that gross incurred claims remained relatively high, though claims stabilised after high expenses from the 2022 southeast Queensland/northern New South Wales flooding event. Net incurred claims "increased substantially, which was largely due to a reduction in reinsurance revenue across almost all business lines".
We also saw the numbers for the three months to June 2023, which were more positive on the insurance side of things. The underwriting profit was $2.6 billion, up from a $0.1 billion loss in the three months to March 2023. It said this was predominately driven by a significant reduction in gross incurred claims.
Which ASX insurance shares I'd buy
Personally, I really like the look of private health insurers more than general insurers like Insurance Australia Group Ltd (ASX: IAG) and Suncorp Group Ltd (ASX: SUN) despite the good earnings recovery.
I'd prefer to be a long-term investor and the long term looks a bit uncertain for general insurers with the increasing number of damaging weather events. These could lead to complications (to say the least) in balancing premiums for households, insurers paying for storm damage, and profitability.
I'm also not sure about what the introduction of automated vehicles on the roads will mean for insurers, though this doesn't seem like an imminent problem at this stage.
Both Medibank Private Ltd (ASX: MPL) and NIB Holdings Limited (ASX: NHF) experienced Australian resident health insurance policyholder growth in FY23.
Medibank's FY23 operating (insurance) profit grew 9% to $647.5 million, while overall net profit rose 30% thanks to net investment income of $138.6 million. NIB's underlying operating profit increased 11.1% to $263.2 million, while net profit jumped 43%.
I also like NIB's exposure to travel insurance and international worker and student health insurance. These are seeing strong recovery thanks to open international borders.
Both Medibank and NIB are expecting private health insurance growth in FY24. I think Australia's growing population (and more international visitors) can be a real boost for the ASX shares' long-term profitability.
Valuations
According to estimates on Commsec, both the Medibank and the NIB share prices are valued at 19x FY24's projected earnings.
I'm backing both of these insurance players to grow their insurance profits in the long term which I believe can help drive shareholder returns.
For starters, the dividends from the businesses are growing nicely. Commsec numbers imply a possible grossed-up dividend yield of 6.25% from Medibank in FY24 and NIB could pay a grossed-up dividend yield of 5.1% in FY24. I think both businesses are primed to deliver attractive shareholder returns.
