Insurers hammered after storms slam Australia’s east coast

Shares in Australia’s major insurance businesses Insurance Australia Group Ltd (ASX: IAG), Suncorp Group Ltd (ASX: SUN) and QBE Insurance Group Ltd (ASX: QBE) fell heavily in morning trade after storms hit Australia’s east coast over the weekend.

Insurers earn profits on the spread between premiums collected and claims paid out and storm damage is a clear short-term negative for general insurance majors as it leads to a substantial claims spike amongst affected households and vehicle owners. This in effect means the spread on the profit margins is pared back as claims are paid out on a level above what the insurance companies will budget for on an annual basis.

Insurers also earn significant investment returns by reinvesting the vast amounts of premiums collected in various debt and equity capital market securities. Investment returns on what is known as the float are also a core earnings driver and today’s low returns on US treasuries and other government debt has proven a thorn in the insurers’ side ever since the GFC of 2008/09.

Over the long term though storms are not all bad news as they always lead to a substantial uptake in new insurance policies by consumers who are reminded of the worth in covering themselves against storm damage. In fact without regular storms the insurers would be short of business and find it harder to grow premiums over time.

Elsewhere the storms knocked-out the cloud computing and other online services of US tech giant Amazon Web Services. This reportedly affected digital retailers like Domino’s Pizza Enterprises Ltd (ASX: DMP) that may have left storm-shy customers hungry after its website remained out of service for several hours on Sunday. According to reports in The Australian Financial Review customers of the Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) were also reportedly affected when attempting to make payments.

This is an embarrassing outcome for Amazon Web Services if proven to be true, although with the stock at a record high its shareholders are unlikely to be concerned over any short-term storm fallout.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

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The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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