What: Fund Manager Justin Braitling who runs over $300 million including the listed investment company (LIC) Australian Leaders Fund Limited (ASX: ALF) has highlighted in a recent report why investors in insurance stocks such as Insurance Australia Group Ltd (ASX: IAG) and Suncorp Group Ltd (ASX: SUN) should be careful.
Braitling notes that the profit margins of Australian insurers are amongst the highest in the world which of course makes the sector ripe for competition.
He suggests that there is an increasing threat of emerging competitors targeting the most profitable segments of the Australian household insurance industry which could likely lead to a shrinking of the margins of the incumbent market-leading providers, particularly IAG and Suncorp.
Now What: The advent of comparator websites such as the listed iSelect Ltd (ASX: ISU) has created a much more even playing field for smaller insurers and also dramatically increased the visibility on premium pricing for consumers.
Amongst the smaller players are some big names. These include global insurers such as Progressive Insurance along with supermarket retailer Coles-branded insurance who according to the report have managed to grow their share of the motor vehicle market from 4.6% to 12.4% in the past four years.
Insurance businesses are inherently difficult to analyse and value, largely because of the complexities of understanding their liabilities. For most investors, the insurance industry would fall outside of what Warren Buffett likes to refer to as a "circle of confidence" so if you choose to invest here, take care!
