How fund managers are turning to insurers in high interest rate environment

Slowing down of economy is mitigated by buying up insurers

How fund managers are turning to insurers in high interest rate environment

Insurance News

By Jonalyn Cueto

To protect against an economic slowdown, fund managers have been buying up insurers over the big four banks, according to a Financial Review report.

It was suggested in the report – which can be read in full here - that customers are more willing to pay for higher insurance premiums – meaning fund managers are able to make money on their investments. The top picks for fund managers are ASX-listed insurers, such as QBE and IAG.

The benefits of a high-interest environment

Luke McMillan, head of research at Ophir Asset Management, said insurance broker network AUB Group and private health insurer NIB Holdings are on his radar as they might shore up the portfolio against a slowdown in the economy that remains a risk. He said this is because insurers  “typically do quite well” in a slower economic growth environment or even a recession, as they did during the global financial crisis.

“They’re one of the last things that individuals or businesses typically want to cut during an economic downturn – they’re really essential services,” McMillan said.

Richard Schellbach, UBS’ equity strategist in Australia, noted in a report to clients that the UBS’ portfolio was “defensively skewed” and had a “preference for stocks with income, and or non-cyclical growth channels”.

“The insurance sectors still satisfies both,” Schellbach wrote, “as a premium hardening cycle in an environment of strong pricing power enables earnings to grow in tandem with attractive dividend yields.”

AUB Group and QBE Insurance are also on the UBS’ list of most preferred stocks. In the same note, Schellbach wrote that RBA’s rate increase “plus the possibility of another in February” would test the Australian economy that had “so far detached itself from the rate-hiking cycle”.

Julia Weng, portfolio manager for Paradice Investment Management, said improvements have been seen in insurance margins and the companies have been reporting double-digit topline growth with this set up. “While affordability is front of mind, insurance is mostly [viewed] as a non-discretionary spend, so consumers have responded by trimming expenditure in other areas,” she said. “Households can shop around, but higher premiums are an industry-wide trend.

“Another tailwind across the insurers is the benefit of higher interest rates, which the insurers earn on the premiums received, [which has been] a significant boost to the bottom line and capital position.”

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