Insurance stocks experienced a massive run-up in 2024, with names like IAG, Suncorp and QBE delivering returns (including dividends) of 54%, 44% and 34% respectively.
Despite rallying to multi-year highs, Morgan Stanley says insurers can perform again in 2025. "We think double-digit earnings growth, improving earnings quality and imminent capital management from all three insurers will drive the sector's next leg up," the analysts said in a note on Tuesday.
Pricing growth for insurers is slowing but remains robust enough to support healthy top-line growth, which continues to outpace claims inflation. According to Morgan Stanley's proprietary pricing survey, "Australian home & motor pricing appears to have peaked." The survey highlights that new home insurance premiums in December 2024 rose 5% year-on-year, while motor premiums declined by 3%.
While the growth rate is decelerating, it’s worth noting that home premiums have surged 54% and motor premiums 56% since December 2021, showcasing significant cumulative increases over the past three years.
Looking ahead to gross written premium (GWP) – a measure of the insurer's ability to generate revenue from underwriting activities – Morgan Stanley expects growth to moderate across the board.
IAG to slow to ~7% in FY25 from 11.5% in FY24
Suncorp to ease to 8.5% in FY25 from ~14% in FY24
QBE to rise to 3.7% in FY25 from 2.6% as portfolio exits come to an end
While pricing growth is slowing, input costs are also easing. Inflation in Australia and other developed markets has been moderating. Both Suncorp (SUN) and IAG have reported that Australian motor inflation had decreased to 5–10% by mid-2024, with home insurance inflation slowing to high single-digit or low double-digit levels. Additionally, reinsurance costs have declined by a high single digit in the January 2025 renewals.
What does moderating pricing mean for earnings growth? Premiums typically take 12–24 months to be fully earned. This dynamic is expected to support margin expansion, as net earned premiums (NEP) growth remains strong while inflation continues to slow. Morgan Stanley forecasts the strongest growth for Suncorp (SUN), with an expected underlying insurance profit growth of around 20% in FY25, nearly matching the high levels seen in FY24.
An imminent catalyst for insurers is the expected start of buybacks, following several years of strong profits and improved earnings quality, particularly due to well-managed catastrophe (CAT) costs in the past 6–12 months, according to Morgan Stanley. In FY25, the analysts forecast:
IAG: $350 million buyback expected to resume with February 2025 results
Suncorp: $625 million buyback expected to start in 2H25 and continue into FY26
QBE: US$300 million (~A$485 million) buyback expected to begin with February 2025 results
Morgan Stanley prefers QBE Insurance as the stock is trading at approximately 10x FY25 earnings while delivering "better earnings consistency and presenting capital management options for the first time in several years."
In order of preference and financial metrics:
Ticker | Company | Rating | Target | Upside/Downside | FY26e PE | FY26e Yield |
---|---|---|---|---|---|---|
QBE Insurance | OW | $23.50 | 19% | 9.3x | 5.0% | |
Suncorp | OW | $22.10 | 13% | 15.8x | 6.3% | |
Insurance Australia Group | EW | $8.00 | -7% | 19.1x | 3.9% |
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