Suncorp, Insurance Australia Group face heightened profit, dividend … – The Australian Financial Review

The prospect of another La Niña weather event threatens the earnings and dividends of Suncorp and Insurance Australia Group, whose losses could be more severe than indicated in their catastrophe budgets, warns Morgan Stanley.
After reporting the effects of wild flooding earlier this year on their bottom lines, both insurers are facing a third consecutive La Niña in Australia in spring.
The return of La Nina follows the devastating floods that hit eastern Australia earlier this year. Brook Mitchell
The Bureau of Meteorology has placed a 70 per cent likelihood on this occurring, having already declared a negative Indian Ocean Dipole (IOD) – a measure of temperature variability – expected to trigger increased rainfall over the southern and eastern parts of the country.
“Historically, a negative Indian Ocean Dipole plus La Niña have led to record losses,” said Andrei Stadnik, financials analyst at Morgan Stanley.
“We see earnings and dividend risks for Suncorp and Insurance Australia, plus less capital optionality as both began the 2023 financial year with little excess capital.”
The broker noted that on four occasions since 1970, catastrophe losses reached more than $5 billion when a negative IOD preceded a La Niña event.
While Suncorp and IAG have increased their catastrophe budgets for the 2023 financial year to about 11.5 per cent of their net earned premium, the broker questioned whether this was enough.
“If a third La Niña season eventuates, losses are likely to be more severe than what Suncorp and Insurance Australia have priced into [catastrophe] budgets,” Mr Stadnik said.
The domestic insurers have a tendency to exceed those budgets in a regular year, which has contributed to large margin swings and more volatile earnings. Taking this into consideration, Morgan Stanley forecast catastrophe losses for the 2023 financial year of 12 per cent of net earned premium.
The broker pointed out that both Suncorp and IAG have little excess capital that could spill over into dividends over the next 12 months.
Meanwhile, weather events could disrupt supply chains and cause further delays to claims handling, which would add to inflationary pressures in the insurance sector. Reinsurers might also raise prices, Morgan Stanley said.
The broker believes financial 2024 will provide a reprieve for Suncorp and IAG in terms of catastrophe-related costs, and price increases will support underlying margins. However, that is unlikely to be materially below catastrophe budgets nor enough to generate excess capital.
Morgan Stanley has an “underweight” rating on both Suncorp and IAG with a price target of $10.20 and $3.90 respectively.
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