Insurers To Pamper Shareholders With Buybacks

This story features INSURANCE AUSTRALIA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: IAG

Analysts anticipate buyback announcements during the February reporting season will help sustain ongoing share price gains for the big three general insurers on the ASX.

-Ongoing share price upside potential for ASX-listed general insurers 
-Share buybacks a near-term positive catalyst
-Preferred sector exposures and potential risks

By Mark Woodruff

After material share price outperformance by the big three General Insurers on the ASX last year, new research reports out this week from several broking houses suggest further upside potential in 2025.

While the ASX200 gained 11% (total return) in 2024, shares in Insurance Australia Group ((IAG)), Suncorp Group ((SUN)), and QBE Insurance ((QBE) gained 54%, 44% and 34%, respectively, but are still only trading on mid-cycle multiples, highlights Morgan Stanley.

A near-term positive share price catalyst in 2025, according to this broker, will be the start of share buybacks following several years of strong profits and improving earnings quality, highlighted by catastrophe (CAT) costs coming in below budgets in the past six to twelve months.

On the flipside, the analysts suggest investors monitor lower margin momentum into FY26, should insurance pricing slow further following recent outsized price increases.

While pricing is slowing, it is still strong enough to drive healthy revenue growth for the insurers, which the broker believes will exceed claims inflation.

Due to lower pricing, Morgan Stanley expects gross written premium (GWP) growth to moderate to high single digits in FY25 for Suncorp and IAG, while QBE is projected to see a modest growth improvement as portfolio exits conclude.

Despite slowing GWP growth, double-digit profit growth remains achievable.

The broker explains premiums typically take 12-24 months to earn-through, which supports margin expansion as net earned premium (NEP) growth stays elevated while inflation continues to ease.

For instance, Suncorp is forecast to deliver 20% growth in underlying insurance profit in FY25, nearly matching the group’s strong performance in 2024.

Capital returns

Citi expects the majority of Suncorp‘s $4.1bn in bank sale proceeds to be returned to shareholders through a capital reduction and share consolidation, with the potential for a small special dividend.

While these proceeds are well understood, Morgan Stanley forecasts an additional $625m in on-market buybacks beginning in the second half of FY25 and extending to FY27. In total, the analysts estimate Suncorp will return nearly $7.0bn of capital over several years.

For IAG, Morgan Stanley recalls the board paused its $350m buyback after completing just $37m due to the RACQ acquisition in late-2024. Following a strong first half of FY25, the broker anticipates a $350m buyback will be announced alongside first half results in February.

QBE Insurance will be releasing full year results next month and Morgan Stanley believes a US$300m (or around $485m) buyback will be revealed.

Preferred exposures and key risks

From updated research issued by four brokers in the FNArena database over the last week, QBE Insurance is the most favoured sector exposure.

Morgans feels QBE’s price earnings valuation discount of around -8% to peers is overdone, given a strong improvement in financial performance over recent years (e.g. the company is now producing a circa 16% return on equity).

QBE’s exact exposure to the Los Angeles wildfires is a clear topic of interest, with the broker noting industry loss estimates of around -US$40bn.

Losses for QBE should be relatively manageable, concludes UBS, as statutory data show relatively low market shares for the insurer across key exposed classes in California.

UBS makes no changes to its earnings forecasts for QBE given the wildfires event has occurred early in the year with significant CAT budget capacity remaining, though Citi cautions there may be some international market and reinsurance market exposure.

Overall, Citi anticipates benign weather will help QBE’s FY24 reported combined operating ratio (COR), a key metric used in the insurance industry to measure underwriting profitability.

While insurance rate increases are likely to slow and potentially soften in some areas, the analysts believe plenty of profitable underwriting opportunities are available.

Suncorp and IAG should also benefit from benign weather, according to Citi, assisting their upcoming first half reported insurance margins, while investment returns also look set to be strong.

While preferring QBE and IAG, this broker expects management at Suncorp will report strong results, maintaining the company’s strong share price momentum.

In a warning applicable to all three insurers, Morgan Stanley reminds investors to be mindful of increasing regulation, sharply lower pricing or investment yields, persistent inflation, and a sudden pick up in CAT costs.

Aligning with the new research updates over the past week, QBE is the most favoured in the FNArena database.

The average target price by seven covering brokers updated daily is $21.71, suggesting around 6.70% upside to the share price (estimated dividend yield 3.9%).

Of the seven brokers, five have Buy ratings (or equivalent) for QBE and two are on Hold.

For the six brokers researching IAG, there are two Buys and four Holds with an average target of $8.83, while for Suncorp Group there are three Buys and Holds.

The average targets for IAG and Suncorp Group of $8.72 and 20.09, respectively, broadly align with their latest share prices.

Outside of daily coverage, QBE and Suncorp have two Buy ratings each and IAG has one Buy and one Hold.

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