insurers face hits

Article from today's Herald Sun:
http://www.news.com.au/heraldsun/story/0,21985,22168717-664,00.html

Insurers face hits
August 01, 2007 12:00am


ANALYSTS are concerned that general insurers will disappoint investors this reporting season, with the three big listed players all under renewed pressure to meet earnings targets.

While miners such as BHP and Fortescue have increased in value by more than 50 per cent this calendar year, recent extreme weather in Australia and Britain have put the heat on the share prices of QBE, Insurance Australia Group and Suncorp.

At the close of trading on the ASX yesterday, the three stocks were trading at or near their lowest levels in the past six months.

Two of the worst performing members of the insurance index have been Suncorp and IAG, both of which flagged last month they will take big hits from claims relating to the June floods in NSW.

Earnings growth is also being stymied because premiums for commercial insurance policies have continued to fall in the past six months in Australia.

The aggressive price competition has been stoked by North American insurers and this is expected to have taken market share from the local players.

"Anecdotal evidence indicates that competition in the commercial market place remains intense and that premiums are under pressure," said CommSec insurance analyst Carlos Castillo.

"Those price decreases are going to offset the volume growth that occurs naturally when the economy grows."

Rumours have been circulating in the market that Suncorp's commercial arm, Vero, has been losing market share since it was acquired as part of the $8 billion Promina acquisition earlier this year.

Suncorp is under added cost pressure because it is now trying to integrate the Promina business.

Some investors are nervous about the likely benefits of the acquisition and the share price yesterday fell 27 to $19.40.

Suncorp scrip was trading above $22 when the deal was consummated earlier in the year.

QBE, one of the darlings of the stock market, was also sold down yesterday with its shares sliding 22 to $29.97.

QBE is staring down the barrel of some big losses stemming from the floods which have damaged property throughout Britain since last month.

The company has significant exposure to the British property and liability markets and also operates a reinsurance syndicate in the Lloyds market.

Although damage from the floods is still occurring, Standard & Poor's estimates that the final insurance bill for the British industry to exceed pound stg. 3 billion ($7.1 billion).

This will make the English floods the second biggest insurance event on record behind the 1990 wind storms which wrought pound stg. 3.3 billion of damage.

"The vast majority of these losses will be property-related, including business interruption, although motor and liability losses are also expected," S&P said in a report yesterday.

"The profitability of the industry will undoubtedly be severely hit by these events."

IAG has underperformed the ASX 200 Index for most of the past 12 months, generating a negative return of almost 10 per cent.

The company will absorb a $160 million hit as a result of the NSW floods, but is likely to emerge from the British floods relatively unscathed.

IAG recently entered the British market through the acquisition of Equity Insurance and Hastings.

While there has been a surge in claims from policyholders affected by the English floods, BusinessDaily learned yesterday that IAG's direct exposure is relatively modest.

Reinsurance arrangements mean that IAG's maximum exposure to the British floods is likely to be capped at about $5 million.