The Right Stuff

After two brilliant years for investors in general insurance companies, there are signals that the extraordinarily good times are coming to an end.

IAG bore the brunt of the stock market’s reaction to that news last week when it dropped by 4%, although QBE’s results also contained the same message. An outbreak of competition is the main reason '” good for insurance consumers, but not quite so good for insurance company shareholders.

The insurance industry has been and remains a mystery for many investors '” something that seems uncomfortably close to gambling at times, betting on the weather and calamity, never mind its propensity for regular collapses and scandals, of which HIH was just the latest and the worst.

But QBE, IAG, Promina and Suncorp together make up a slice of our stock market that is simply too big to ignore. Their performance post-HIH also would have made them very costly to ignore. Thus the questions for investors are how reliable is the industry now and whether there is much room left for out-performance, after which comes the issue of which company is the best of breed.

I spoke to IAG chief executive Michael Hawker after he released his results on Friday with those thoughts as the subtext to the video interview published today. IAG reported a 14% increase in net profits to $760 million.

Hawker already is one of Australia’s most interesting CEOs, thanks to the job he has done transforming NRMA Insurance, a company suffering from a dysfunctional board, into the successful and growing Insurance Australia Group. The next few years will determine if he’s also one of our best corporate leaders.

Under Hawker and chairman James Strong, IAG has been working to extend the uses of its database and better understand all the factors that impact on insurance costs and profits. At one end, that strategy has seen it fall foul of motor repairers as it tries to drive down repair costs. At the other, the company is involved in activities as diverse as conducting research into what roofing materials will best handle the more damaging weather expected from global warming to trying to reducing theft by helping homeless youth.

I’ve followed Hawker’s career since he was a senior executive at Westpac and seen as potential chief executive of the bank, something that still might not be out of the question. He seems to be one of the few CEOs who genuinely walk the walk of triple-bottom-line sustainability, as well as talk about it.

Now that he is also the president of the Insurance Council of Australia, there is an increased opportunity for him to press for industry and government reforms that should benefit us all, shareholders and consumers alike.

One area is the outrageous pillaging of consumers’ pockets by State Governments as they make insurance our most highly taxed industry and inflate premiums. Another is the provision of a safety net for people who suffer catastrophic injuries but aren’t covered by insurance.

NRMA was the insurer of the car driver who crashed into a Sydney childcare centre in December 2003 with horrific results for two young girls. Under existing law, the children would receive no assistance as the driver was judged not to have been negligent. NRMA continues to help with the girls’ medical needs anyway, and it has used this tragic example to lobby for the introduction of a no-fault scheme.

The insurance industry has been working with governments to try to develop such a scheme for two years '” but there’s still no starting date. Hawker remains a vocal proponent, as you should be able to read in the transcript of the longer interview on the site later in the week.

What’s not in the interview, though, is a discussion of just which insurance companies are competing hardest at present to grab business i.e. offering the lowest premiums. Hawker stresses the importance of the insurance industry keeping its head in assessing risk, but mentions no names.

Well, at least for motor insurance, I can fill in the gap after quite a bit of comparative shopping recently: If you’re looking for comprehensive motor vehicle insurance and you haven’t obtained a quote from Allianz, you might be paying too much.

By implication, IAG believes Allianz has not assessed the market risk as well as the market leader because its database obviously isn’t as large as IAG’s. Without checking, I suspect Allianz believes the opposition is charging too much and its actuaries are as good as any.

It is an interesting bet between those trying to hold the line on insurance premiums and those doing the undercutting. It is not as big as the bet between the Australian banks increasing market share and those losing it, but it’s nonetheless important for consumers and shareholders.

- Michael Pascoe

Two disclosures: The Pascoe family, along with about a million other individuals, owns IAG shares; and I actually first took an interest in Michael Hawker’s career much earlier than his Westpac days, back in 1980 when he became a Wallaby - and a very talented one at that.