Insurance companies make up a substantial portion of the S&P/ASX 200 (ASX: XJO) index.
Insurance giant, QBE Insurance Group Ltd (ASX: QBE) has a market cap around $30 billion, putting it in the top 20 on the list. While Insurance Australia Group Ltd (ASX: IAG) is lower down the list with a market cap around $19 billion.
Both insurance shares have performed well over the past year.
QBE shares are 2.4% higher today and changing hands at $19.96 a piece, at the time of writing. For the year the shares are up 13.2%.
IAG shares are also climbing today. At the time of writing the shares are 2.24% higher and changing hands at $8.00 per share. For the year the shares are 4.9% higher.
For context, the ASX 200 index is 0.24% higher at the time of writing. Over the year the index is up 7.6%.
So, after a year of increases, are these two shares still a buy? And which insurance stock is the favourite for analysts at Macquarie Group Ltd (ASX: MQG)?
Here's what the broker has to say.
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Upside ahead for QBE and IAG shares
In a new note to investors, the broker has confirmed its neutral rating on QBE and IAG shares. It has also maintained its target price of $23.30 and $9.10 on the shares respectively.
At the time of writing this implies a potential 13.7% upside for IAG shares. For QBE shares, the broker's target price represents a potential 16.7% upside over the next 12 months.
The update comes following a Bloomberg article citing developments in US silicosis cases. This will become a background issue for insurance companies over the next decade.
The broker said in its note:
Court cases locally and internationally need to determine if silicosis exclusions within insurance policies hold for broader "non silica irritants". Locally, insurers have various degrees of reinsurance protection, but the gross exposures by the insurer will not be known until it is too late. What we do know is that this will be a background issue for the global insurance sector for the next decade.
What happened?
On 17 October, stock prices across the Australian General Insurance sector fell sharply following multiple Bloomberg articles drip feeding information about US silicosis court cases, the note explains. There are still a handful of cases outstanding in California, each due to hear motions this month.
Silicosis is a lung disease caused by inhaling silica dust, which is found in materials like quartz, granite, sandstone, and especially engineered stone. It leads to progressive and irreversible lung damage, and is one of the oldest known occupational diseases.
"This is not a foreign topic for Australian investors, with IAG flagging these risks for some time," Macquarie analysts said.
Reinsurance announcements included: #1) Jun '24: An ADC with Enstar included a $50m silicosis sub-limit for losses occurring prior to 30 Jun '23; #2) Jun '15: An ADC with BH Re for legacy General Liability and Workers' Compensation policies issued prior to 31 Dec '15 for exposures to asbestos and silica; and #3) Jun '15 and Dec '17: Various 32.5% whole-of-account quota share arrangements.
