Newcomers to share market investing across the globe quickly learn that in times of deteriorating economic conditions investors should seek safety in defensive stocks.  Defensive stocks are those that remain largely unphased by fluctuations in the business cycle.  If a company sells products or services consumers and businesses cannot do without no matter how dire things are, they have historically been considered defensive stocks.

Although some believe the insurance sector stocks traditionally qualify as defensive shares, there are caveats that should not be ignored.  The first is the need to research the types of insurance products offered and the revenue stream from each business segment.  When one thinks of something that must be maintained in tough times, casualty insurance comes to mind.  Consumers and businesses may increase deductibles or reduce coverage to economize, but leaving assets completely unprotected is rarely an option.  Life and health insurance are also things consumers are reluctant to cut back.  Today some insurance companies offer investment advisory services and sell products geared for retirement security.  These are services many Australians are willing to sacrifice in difficult times.

The second caveat applies to all defensive stocks.  Regardless of the degree of defensiveness of its product and service offerings, the company must be fundamentally sound.  Management needs to control the controllable and therein lays the problem with some insurance companies as defensive stocks.  Insurance companies derive revenue from premiums and returns on investments of collected premiums.  This makes evaluating casualty insurers a difficult proposition.  The real measure of long term financial health should be underwriting profit.  However, in some cases insurers show overall profit even with underwriting losses – i.e. more paid out in claims than premiums taken it.  The profit from premiums invested makes up the difference.  With good actuaries a well-managed insurance company can measure risk but in the casualty business, natural disasters are beyond their ability to control.  In Australia, the insurance sector was hammered mercilessly in 2011 after the losses due to the early flooding began to become apparent.  Here is a 2 year share price chart for two of Australia’s leading general insurance companies -QBE Insurance Group (QBE) and Insurance Australia Group (IAG):

Since the 2011 flooding was beyond the control of these companies and they appear to be recovering in 2012, do they now qualify not only as defensive stocks, but also as beaten down value plays?

Some Australian financial analysts believe this to be the case.  If you have access to analyst recommendation reports you are likely to find commentary citing 2011 as an unusual or atypical year, filled with disasters from flooding here and in Thailand to earthquakes in New Zealand to the tsunami in Japan.

But what if atypical is becoming normal?  The top ten natural disasters in 2011 cost the insurance industry an estimated $107 billion dollars, USD.  In late March 2012 yet another international panel of climate scientists released a report claiming exactly that – extreme weather heretofore considered unusual will continue and increase in the future.

This brings us face to face with the contentious issue of climate change due to global warming.  Buried at the core of the debate is the slippery principle of causation.  Climate change deniers deeply believe this is only Mother Nature venting her spleen and we cannot do anything about.  Climate change believers point the causal finger squarely at human activity, ignoring the fact global climate changes have occurred in the far distant past when human activity could not have been a factor.

There is a new voice to be heard in the debate and it is not the voice of another group of wild-eyed, tree-hugging greens.  It is the voice of the free market – the reinsurance industry.

All casualty insurers themselves buy “insurance” against catastrophic loss, aptly named reinsurance.  Two of the biggest reinsurers on the planet – Munich Re and Swiss Re – have stated unequivocally that climate change is real; that it is a result of global warming; and that human activity is contributing to global warming.  Both believe you cannot prove direct causation at this point, but both are calling for reducing the carbon emissions they think are part of the problem.  

Another global reinsurer, AON Benfield issues a yearly and quarterly report on global climate and catastrophes.  Here is what their report shows for the first three months of 2012 in our region:

Oceania (Australia, New Zealand and the South Pacific Islands)

Event Date Event Name or Type1 Event Location # of Deaths2 # of Structures/Claims2,3 Damage Estimates2.4 (USD)
2/24-3/16 Flooding Australia (NSW, Victoria) 2+ 8,914+ 1.58+ billion
3/17 CY Lua Australia (WA) 0 Hundreds+ 230 million
3/20 Severe Weather Australia (Queensland) 0 150+ 21+ million
3/29-4/3 Flooding Fiji 7+ Hundreds+ Millions+


The insurance losses from the 2011 Queensland flooding were $2.42 Billion.  Now here is a chart showing climate related catastrophes for the same period in the US:

United States

Event Date Event Name or Type1 Event Location # of Deaths2 # of Structures/Claims2,3 Damage Estimates2.4 (USD)
3/2-3/3 Severe Weather Midwest, Southeast 41+ 170,000+ 2.0+ billion
3/4-3/9 Flooding Hawaii 0 Hundreds+ Millions+
3/12 Flooding Louisiana 0 1,500+ 2+ million
3/14-3/15 Severe Weather Great Lakes 0 20,000+ 275+ million
3/18-3/25 Severe Weather Plains, Midwest, Southeast 1+ 1,000+ Millions+
3/26-4/2 Wildfire Colorado 3+ 25+ Unknown
3/29-3/31 Severe Weather Plains Midwest, Southeast 0 Thousands+ Millions+


The insurance industry is beginning to react.  In the state of Florida in the United States, the state government has become the insurer of last resort as consumers and businesses are either being refused casualty coverage or can no longer afford the massive increase in premiums.

The head of Traveler’s Insurance Company there warns that such rate raises and rejections could impact non-catastrophe related coverage from the largest industry players.  Regardless of whether you think climate change is nothing more than a greenish tinged fairy tale, it would appear the casualty insurance industry world wide will have to undergo some significant changes in the way they do business.

If present trends continue, no one is yet sure how the industry will change and as you know, share markets do not like uncertainty.  As indicated, not every insurance company has the same exposure to catastrophic coverage and some have no exposure at all.  Now let’s look at six Australian insurance sector stocks in search of potential value plays.  



Market Cap

Share Price

52 Wk Hi

52 Wk Lo

Dividend Yield

2 Year Dividend Yield Growth Forecast


QBE Insurance Group









AMP Limited









Suncorp Group Limited









Insurance Australia Group









NIB Holdings Limited









Austbrokers Limited









QBE Insurance Group (QBE) is Australia’s largest general insurance company and they have operations worldwide.  They are also a seller of reinsurance in the United States.  In addition, they sell all major lines of personal and commercial risk coverage in Latin America, Europe, Australia, and in the Asia Pacific region.  A new CEO, a UK acquisition, and narrowing credit spreads led to a spike in share price commencing in March.  Analysts remain positive or neutral on the company.

Conservative investors may like the product and geographic diversification of QBE as well as the dividend.  If you are unconvinced of the negative impact of climate change on a company like this, there is one number you need to keep tracking – the net loss ratio.

The loss ratio in the insurance business is the ratio of total losses (claims paid and reserved) plus adjustment expenses divided by the total premiums earned.  If the company paid out $50 in claims for every $100 in premiums collected, the net loss ratio is 50%.  Loss ratios continually above 60% are signs of trouble. QBE’s loss ratio as of December 2011 was 66.4%, up from 59.9% in the prior year.

AMP Limited (AMP) sells personal and group life insurance, as well as disability and income protection insurance as part of their wealth management service.  They are really a wealth management company, with investment advisory services and non-casualty insurance products.  Their recent acquisition of the Australian and New Zealand operations from AXA Pacific Holdings positions them as the largest wealth manager/life insurer in both markets.  In a time when many Australians are more concerned about economic survival than wealth management, it is no wonder AMP has struggled.  Considering the growing number of baby boomer retirees in the offing, AMP is definitely worthy of a look as both a value play and a defensive play.  The following 2 year share price movement chart shows the stock was trending upward prior to the 2011 share market swan dive commencing in mid-year:

Suncorp Group Limited (SUN) can be considered a full service financial company, offering banking, general and life insurance, superannuation and funds management products and related investment advisory services to the retail, corporate and commercial sectors in both Australia and New Zealand.  Their exposure to catastrophic coverage is minimal but it is their exposure to bad loans in their banking division that concerns market participants.  Despite that fact, recent analyst recommendations from December 2011 to the present show 7 out of 8 analysts with BUY ratings on SUN.  While the company should expect growth from the retirement boom, their exposure to bad loan debt is problematic should the property market continue to unravel.

Insurance Australia Group (IAG) is a provider of a wide range of general insurance products in Australia, New Zealand, the United Kingdom, and Asia.  They have substantial exposure to catastrophic loss and their net loss ratio in 2011 was 70.3%, down slightly from 71.8% a year ago.  Recent expansion into Malaysia and Viet Nam gave the struggling share price an upward bump.

NIB Holdings Limited (NHF) and Austbrokers Limited (AUB) are arguably the best prospects on our list for both solid defense and long term value.  In brief, NHF is in the private health insurance business and AUB provides services to independent insurance broker companies.  The two year price movement chart gives us evidence of their defensive capabilities.

Both companies beat the ASX Financial Index (XFJ) by a substantial margin and both stayed positive during the cataclysmic trading year that was 2011.  NHF offers innovative and low cost private health insurance.  The Federal Government Rebate of 30% of private insurance premium cost makes this company’s offerings attractive to the under 40 market.  The rebate for Australians over 70 is 40%, making this company an attractive proposition for retirees willing to pay to avoid the waits with the Medicare system.  Our government through the rebate program and additional tax incentives is actively promoting private health insurance to supplement Australia’s Medicare safety net.

AUB provides support to independent insurance brokers of all types throughout Australia.  Independent brokers sell insurance consumers and businesses need regardless of the state of the economy.  The cost advantage to the individual broker of not maintaining in house staff and the benefit to AUB of safety from underwriting loss makes for a happy marriage for both parties.

After their most recent earnings report, AUB received target price raises from five major firms and NHF has BUY ratings from the four majors covering the stock. 

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