Investing in ASX-listed insurance companies : Here’s what investors need to know and the top 5 companies

Nick Sundich Nick Sundich, April 12, 2023

ASX-listed insurance companies may seem as if they are among the safest investments as far as listed equities go. After all, they collect money from customers and only have to pay that money back if ‘the worst’ happens.

However, it is not as simple as that.


What are the Best ASX-listed insurance companies to invest in right now?

Check our buy/sell tips on the top ASX-listed insurance companies shares in ASX

The basic of investing in ASX-listed insurance companies


How do insurance companies work?

Insurance companies’ (ASX listed or not) business model is based on the concept of risk management and transfer.

They collect premiums from customers in exchange for providing financial protection against certain risks, such as accidents, disasters, or death. The insurance company then charges a fee for this service which allows them to make a profit.

Insurance companies use the money collected from premiums to cover the costs associated with providing coverage. This includes claims administration, customer service and sales expenses, as well as overhead costs like office rent and salaries.

If there are any remaining funds after these costs are taken care of, these are used to purchase investments that can generate additional income for the company over time.

In order for an insurance company to remain profitable over time, it must effectively manage its risk portfolio by making sure that the total amount of premiums received is greater than the total amount of claims paid out.

To do this, they must assess the probability of different types of risks occurring and charge appropriate prices for their policies in order to cover all potential costs while still being able to make a profit.

The success of an insurance company also depends on its ability to accurately predict future losses and adjust policies accordingly while still providing adequate coverage at reasonable rates.

Additionally, insurers must be innovative in order to meet customer demands and attract new business by offering value-added services such as discounts or loyalty programs.


How were insurance companies impacted by the pandemic?

COVID-19 has had a major impact on the insurance industry.

Firstly, the significant increase in unemployment due to the economic slowdown caused by covid-19 has put a strain on life insurance companies as people have been forced to postpone and cancel their policies.

Additionally, many health insurance companies have experienced financial losses due to an uptick in medical costs caused by the virus.

Moreover, insurers are now facing legal action from policyholders who claim they should be covered for business losses related to the pandemic.

Furthermore, travel insurers have seen a decrease in revenue as the demand for travel insurance has declined dramatically due to international travel restrictions and lockdowns.

Lastly, auto insurers have also had to adjust pricing and policies due to drivers being on the road less often during this time.

Ultimately, these changes caused considerable strains on the insurance industry and forced companies to rethink their strategies in order to remain profitable during an unprecedented global crisis.



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What is the environment like now?

Fast forward to 2023 and while the pandemic is behind us, the industry is being impacted by two things.

First, the current bout of inflation has had a significant impact on insurance companies. The rising cost of goods and services has caused an increase in the price of premiums, as insurance companies are forced to cover these costs.

As a result, policyholders have had to bear the brunt of this financial burden, leading to an overall decrease in demand for insurance policies.

Furthermore, inflation has eroded profits for insurers, as they must pay out more money in claims due to increased costs associated with medical care and other services.

Additionally, insurers are facing higher operational costs due to inflation-driven wage and salary increases among their staff members. This is further exacerbated by rising administrative costs associated with keeping up with changing regulations due to the pandemic.

The second impact is that insurers have had to pay out a higher level of premiums due to extreme weather events. It is inevitable that premiums will have to keep rising to compensate for the risk.

These factors will challenge insurance companies’ profitability for insurance companies. They face the dilemma of either raising premiums and risking losing customers or keeping premiums as they are and have to sacrifice margins.

All this said, business insurers are performing better than consumer-facing insurers.


The top 5 ASX-listed insurance companies

QBE (ASX:QBE) is a transnational insurer with operations in 37 countries around the world.

In Australia it offers customers a full range of personal insurance products such as car cover, home & contents cover and travel cover. It also provides a wide selection of life insurance products such as term life cover, whole of life cover and trauma cover.

The company has been performing well in recent times. QBE’s CY22 NPAT was US$770m, up from US$750m in CY21, and it recorded a 10.5% cash Return on Equity.

The company paid a total dividend of 3c per share, representing a payout ratio of 48% of adjusted cash profit and a 2.9% yield.

IAG (ASX:IAG) is Australia’s largest general insurer by gross written premium and the fourth largest in New Zealand.

The company offers a range of personal, business, and specialist insurance products, including car, home & contents, travel, life insurance, and more.

Suncorp (ASX:SUN) is an ASX-listed financial services provider with operations in Australia and New Zealand. Everyone knows this company best for its retail bank, but it also provides a substantial range of insurance products under brands including AAMI, GIO and Vero.

Next is health insurance specialist Medibank (ASX:MPL) which once upon a time was government owned but was privatised and listed in the mid 2010s by the Abbott government.

2022 was all going well for the company until a major cyber breach that caused its share price to crash. Shares have mostly recovered, however.

NIB (ASX:NHF) is far from the largest company but has recorded substantial long-term growth, boasting a 20-year CAGR of 5.4% compared to the industry average 2.2%.

In 1HY23, it made $1.5bn in revenue (up 9.3%), a $91.6m NPAT (up 13%) and a 15.2% ROIC.



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