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Why and how money managers are using insurance companies in today’s high-interest environment

According to the Financial Review, fund managers have been purchasing insurance companies rather than the big four banks as a hedge against a potential economic slowdown.

The report’s findings (which you can read in full here) imply that consumers are prepared to pay higher insurance premiums, providing an opportunity for fund managers to earn a return on their capital. Among the best investments for fund managers are ASX-listed insurance companies like QBE and IAG.

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Ophir Asset Management’s head of research, Luke McMillan, said he is keeping an eye on the insurance broker network AUB Group and the private health insurer NIB Holdings as potential investments to protect the portfolio against an economic slowdown. Since insurers “typically do quite well” in a slower economic growth environment or even a recession, he reasoned that this was the case during the 2008–2009 monetary 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 added.

UBS equities strategist Richard Schellbach wrote in a client report that the firm’s holdings were “defensively skewed” and that they had a “preference for stocks with income and/or non-cyclical growth channels.”

Schellbach said that the insurance industry still meets the needs of both investors and income investors. This is because a premium hardening cycle in a climate of strong pricing power lets earnings grow at a rate that is in line with great dividend yields.

UBS also favors QBE Insurance and AUB Group stock highly. In the same letter, Schellbach argued that the RBA’s rate increase and “the possibility of another in February” would test the Australian economy, which had “so far detached itself from the rate-hiking cycle.”

According to Julia Weng, portfolio manager at Paradice Investment Management, insurance margins have improved, and companies have reported double-digit top-line growth using this structure. “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 added. Although households have the option to shop around, rising premiums are a common phenomenon in this sector.

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

What do you think?

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