Around 15,000 insurance claims have already come in for the Auckland floods. Photo / Michael Craig
Shares in listed insurers have taken a dive with the Auckland flooding, but the full impact on the companies won’t be known for some time yet.
About 15,000 claims have already been made. New Zealand’s largest insurer, IAG - whose brands include AMI, State Insurance and NZI - has borne the brunt with about 10,000 of those claims.
Shares in ASX-listed IAG fell sharply early in the week, dropping from A$5.08 to A$4.88, but have bounced back a little since then. IAG is estimated to have about 51 per cent of the personal lines insurance market in New Zealand, according to Forsyth Barr research, with ASX-listed Suncorp (whose brands include Vero and AA Insurance) the second largest player at 28 per cent.
NZX-listed Tower is the third largest player with a 10 per cent market share and the remainder of the market makes up about 11 per cent. Key to how each insurer is affected is how much they have budgeted for large claim events.
Jarden analysts Kieren Chidgey and Elizabeth Miliatis noted this week that until the recent floods, IAG and Suncorp had both enjoyed relatively benign summers for catastrophe claims.
But they said the flooding had increased the likelihood of the companies exceeding their catastrophe budgets, particularly for IAG which had higher retention requirements under its new reinsurance cover.
In a statement to the market, IAG said on Monday that it was too early to determine the financial impact of the Auckland event but warned it may need to review its estimate for 2023 financial-year natural peril costs.
“IAG has extensive reinsurance arrangements in place for natural peril catastrophe events,” said the company. “As announced on 10 January 2023, in conjunction with IAG’s Whole of Account Quota Share arrangements, the combination of all catastrophe covers at 1 January 2023 results in IAG having a maximum event retention of A$236 million.”
That means the most it will pay out is limited to that A$236m, or about $258m.
But the Jarden analysts said after taking into account the fact that December and January typically accounted for a third of gross catastrophe costs for IAG, they estimated the company would need another A$100m to cover catastrophe costs for its full financial year.
That resulted in them revising IAG’s earnings per share down 5 per cent, although they left the 12-month target price unchanged at A$5.65.
Suncorp has a cap of A$46m for New Zealand catastrophe claims, meaning it is on the hook for much less than IAG.
The Jarden analysts said Suncorp was unlikely to need more than that and left its target price unchanged at A$13.50. However, they forecast greater reinsurance renewal risk for the 2024 financial year, with lower catastrophe retentions in New Zealand.
They estimate the total cost of the flooding could be A$700m to A$900m, with IAG on the hook for a potential gross cost of A$290m to A$390m and Suncorp A$190m to A$250m.
Forsyth Barr analyst James Lindsay said it was really too soon to know the total cost to insurers. He estimated there could be around 25,000 claims across the industry and with a ballpark cost of $10,000 to $20,000 per claim, the total cost could be somewhere between $250m and $500m - much lower than the Jarden estimate.
That would still make it the largest natural disaster insurance claim event in New Zealand outside of the Canterbury and Kaikōura earthquakes.
Lindsay estimates Tower’s claims tally will rise from 1900 to about 2500, but he doubts it will cause much trouble for the New Zealand insurer.
“I don’t think it will have a detrimental long-term effect. They have done a considerable amount of work knowing the number of floods have been increasing over recent years and have been proactive about understanding those risks and pricing those risks. They have got a very solid reinsurance programme as well.”
Tower moved to a risk-based pricing model for flood insurance in 2021, meaning it charges higher premiums for policy-holders with flood-prone properties. It is due to renegotiate its reinsurance by October but Lindsay expected the change of model would put the company in good stead.
“This year IAG and Suncorp, their cost for reinsurance rose pretty significantly - it would be my summation that Tower moving to risk-based pricing and being able to prove to reinsurers they understand the risks they have taken on have led to them being better positioned on that reinsurance.”
Tower chief executive Blair Turnbull said each year it planned for large events and had a robust reinsurance agreement with multiple treaties in place.
“Our reinsurance excess of $11.85m for the floods is well within the $30m we have budgeted for large events in FY23.”
Turnbull said recent experience indicated the severity and frequency of extreme weather events was increasing. Insurance Council data shows the cost of all natural disaster claims (excluding the earthquakes) has been rising steeply since 2016.
Tower shares fell from 71c on Friday January 27 to close Thursday’s trading at 66.5c.
New Zealand and Australian sharemarkets have kicked off 2023 on a strong note.
Australian equities started the year on the front foot, as the S&P/ASX 200 Index surged 6.2 per cent - its best month since March 2022 and best start to a year since the index was created in 2000, S&P Dow Jones Indices said in a report.
Aussie mid-cap companies slightly lagged their large- and small-cap brethren, S&P said.
New Zealand’s S&P/NZX 50 Portfolio Index also advanced, up 4.15 per cent in January.
Micro-caps lagged, with the S&P/NZX Emerging Opportunities Index edging up 2.9 per cent.
The S&P/ASX 200 Consumer Discretionary Index was the star performer among Australian sectors this month, surging 9.9 per cent, while at the back of the pack, Utilities shed 3.0 per cent.
Ten out of 11 Australian sectors contributed positively to January returns, with Materials responsible for over a third of the S&P/ASX 200′s gain.
It was a great month for fixed-income, too, S&P said.
Inflation-linked bonds provided the highest returns in both Australia and New Zealand, with the S&P/ASX Government Inflation Linked Bond 0+ Index climbing 5 per cent while the S&P/NZX Inflation-Indexed Government Bonds Index gained 3.6 per cent in January.
New Zealand residential construction may be stalling, but at least one broker remains upbeat about industry giant Fletcher Building.
Forsyth Barr analysts reiterated their outperform rating on the stock this week with a 12-month target price of $6.10. Fletcher Building shares have fallen close to 20 per cent over the last year and ended Thursday’s trading at $5.34.
While Rohan Koreman-Smit and Paul Koraua acknowledge the near-term outlook for residential construction activity is negative, they see reasons for optimism.
“Despite the near-term risks there are reasons to suggest the medium-term picture could improve.”
They point to interest rates appearing to be close to peaking, a stronger-than-expected rebound in immigration, a push by the Government to continue building and signs that the cost of supplies will moderate.
The analysts expect annual residential building consents to fall to 31,000 from the current 50,000 level, although they believe real residential work will only be down from 39,000 as capacity constraints have kept a lid on what can actually be built.
Meanwhile, they expect non-residential building to fall by 8 per cent with weaker demand for office, industrial and retail buildings partly offset by health, education and accommodation.
“We expect infrastructure spending to continue to grind higher, underpinned by central and local government investment.”
On the positive side, the analysts say Fletcher Building is operationally in its best shape for a while with legacy issues largely behind it. The stock is trading well below its long-run price-to-earnings ratio, and is at a significant discount to Australian peers.
Koreman-Smit and Koraua say the market is pricing in a 40 per cent drop in earnings before interest and tax but their forecast is only for a 22 per cent drop.
“In past cycles, FBU’s [Fletcher Building’s] share price has begun to rally around five months before earnings stopped declining. While stabilisation of the house prices may be required for a more meaningful rerate in FBU’s share price, peaking mortgage rates and rapidly improving migration will likely reduce negative sentiment over the next 12 months, hence, our positive view rating.”
OPINION: You never know when bad luck might strike.