The top three property and casualty insurers in Australia are expected to nearly double their ordinary dividends for fiscal 2023, despite the projected negative impact of a wet spring and early summer on catastrophe budgets.

QBE Insurance Group Ltd., Australia's largest P&C insurer based on market capitalization, is forecast to declare a total dividend of 65 Australian cents for its fiscal 2023, nearly double the 33 cents per share S&P Global analysts predicted for fiscal 2022. The upbeat estimate comes as analysts expect QBE's earnings to continue improving in the next few years, after recovering from an A$863 million cash loss in fiscal 2020 to record an A$805 million cash profit in fiscal 2021.

Suncorp Group Ltd. is predicted to declare a total dividend of 71 cents for fiscal 2023 after closing fiscal 2022 with a total dividend of 40 cents per share. S&P Global analysts expect the second-largest Australian P&C insurer to maintain its payout ratio at the top end of the target range under its current dividend policy, despite the effects of natural hazards and volatility in the investment market.

Insurance Australia Group Ltd.'s earnings will also likely rebound in fiscal 2023, and the insurer is expected to pay a total dividend of 24 cents, more than double the 11 cents it paid in fiscal 2022.

As analysts also forecast an earnings rebound despite higher catastrophe costs weighing on profits, all three insurers are expected to increase their earnings per share significantly in fiscal 2023 and 2024.

The La Niña effect

Australia is currently enduring a third La Niña event that started bringing heavy rains and flooding to large swaths of the country as soon as spring began in October.

The February-March floods that hit southeast Queensland, the Northern Rivers and other parts of New South Wales early in 2022 led to 230,000 claims, with insured losses reaching a "record-breaking" A$5.13 billion, the Insurance Council of Australia announced in July.

Aside from La Niña, the country's Bureau of Meteorology forecast in September the occurrence of a significant negative Indian Ocean Dipole event, which usually brings increased rainfall across Australia, and a positive Southern Annular Mode, which heightens the possibility of rain in New South Wales, eastern Victoria and southern parts of Queensland.

Historically, the combination of La Niña and a negative Indian Ocean Dipole does not bode well for Australian insurers.

The two events are associated with elevated perils for insurers, J.P. Morgan analyst Siddharth X. Parameswaran said in a research note. La Niña years and negative Indian Ocean Dipole years see higher insurance catastrophe costs, on average, according to the analyst.

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Catastrophe allowances

Amid the wet weather, Australian insurers may have to stretch their catastrophe allowance and reinsurance cover, especially after experiencing a bad La Niña in their fiscal 2022. Suncorp and IAG are likely to experience "more severe" losses than they priced into catastrophe budgets from another La Niña, Morgan Stanley analyst Andrei Stadnik said.

IAG ended its fiscal 2022 with natural peril claims exceeding A$1.1 billion, which was A$354 million above its allowance of A$765 million.

Similarly, Suncorp received around 130,000 natural hazard claims in its fiscal 2022, which were estimated to cost A$1.08 billion, or A$101 million more than the A$980 million allowance for that year.

QBE also saw higher-than-expected catastrophe costs during the first half of fiscal 2022 as property losses rose across Australia due to an extended La Niña.