Flood claims may push insurers over budget
SHARES in listed insurers have taken a dive with the Auckland flooding, but the full impact on the companies will not 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 ASXlisted IAG fell sharply early in the week, dropping from $A5.08 ($NZ5.53) to $4.88, but have bounced back a little since then. IAG is estimated to have about 51% of the personal lines insurance market in New Zealand, according to Forsyth Barr research, and ASXlisted Suncorp (whose brands include Vero and AA Insurance) is the second largest player at 28%.
NZXlisted Tower is the thirdlargest player with a 10% market share and the remainder of the market makes up about 11%.
Key to how each insurer is affected is how much they have budgeted for large claim events.
Jarden analysts Kieren Chidgey and Elizabeth Miliatis said this week, until the recent floods, IAG and Suncorp had both enjoyed relatively benign summers for catastrophe claims.
But 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, they said.
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 might need to review its estimate for 2023 financialyear natural peril costs.
‘‘IAG has extensive reinsurance arrangements in place for natural peril catastrophe events,’’ it said.
‘‘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 $A236 million.’’
That means the most it will pay out is limited to that $236 million.
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 $100 million to cover catastrophe costs for its full financial year.
That resulted in them revising IAG’s earnings per share down 5%, although they left the 12month target price unchanged at $5.65.
Suncorp has a cap of
$46 million 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 $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
$700 million to $900 million, with IAG on the hook for a potential gross cost of $290 million to
$390 million and Suncorp
$190 million to $250 million.
Forsyth Barr analyst James Lindsay said it was really too soon to know the total cost to insurers. He estimated there could be 25,000 claims across the industry and with a ballpark cost of $NZ10,000 to $20,000 per claim, the total cost could be somewhere between $250 million and $500 million — 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 Kaiko¯ura earthquakes.
Mr 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 longterm 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 riskbased pricing model for flood insurance in 2021, meaning it charges higher premiums for policyholders with floodprone properties. It is due to renegotiate its reinsurance by October but Mr Lindsay expects the change of model will 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 riskbased 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 $11.85 million for the floods is well within the $30 million we have budgeted for large events in FY23.’’
Mr 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% — 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.
Australian midcap companies slightly lagged their large and smallcap brethren, S&P said.
New Zealand’s S&P/NZX 50 Portfolio Index also advanced, up 4.15% in January.
Microcaps lagged, with the S&P/NZX Emerging Opportunities Index edging up 2.9%.
The S&P/ASX 200 Consumer Discretionary Index was the star performer among Australian sectors this month, surging 9.9%, while at the back of the pack, Utilities shed 3%.
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 fixedincome, too, S&P said.
Inflationlinked bonds provided the highest returns in both Australia and New Zealand, with the S&P/ASX government inflationlinked bond 0+ index climbing 5% while the S&P/NZX inflationindexed government bonds index gained 3.6% 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 12month target price of $6.10. Fletcher Building shares have fallen close to 20% over the last year and ended Thursday’s trading at $5.34.
While Rohan KoremanSmit and Paul Koraua acknowledge the nearterm outlook for residential construction activity is negative, they see reasons for optimism.
‘‘Despite the nearterm risks, there are reasons to suggest the mediumterm picture could improve.’’
They point to interest rates appearing to be close to peaking, a strongerthanexpected 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 nonresidential building to fall by 8%, 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, Fletcher Building was operationally in its best shape for a while, its legacy issues largely behind it. The stock was trading well below its longrun pricetoearnings ratio, and was at a significant discount to Australian peers, they said.
The market is pricing in a 40% drop in earnings before interest and tax, but their forecast is only for a 22% drop, Mr KoremanSmit and Mr Koraua said.
‘‘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.’’ —