Suncorp
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 15 December 2015, 8:36 AM
- Sectors Covered:
- Insurance, Diversified Financials
Key points
- Suncorp's general insurance update has shown significant emerging pressures in the cost of settling claims. These pressures are recurring rather than one-off in nature.
- The general insurance business is now facing a difficult top line environment and supply constraints impacting claims costs.
What happened?
Suncorp Group (SUN) has announced a 10% Insurance Trading Ratio (ITR) versus the 14.6% level achieved in FY15. The bulk of the fall in margin is being attributed to working claims cost inflation in Personal Insurance, with some smaller impacts from large loss experience in commercial insurance and rising frequency in Compulsory Third Party claims.
Management indicated claims cost inflation is stemming from repairer supply constraints in home insurance, together with the impact of the A$ depreciation on parts costs. Management is undertaking action to address the issue including claims and pricing initiatives.
Timeline on recovery of margins difficult to call
Disconcertingly, the drivers of today's underlying margin downgrade are recurring in nature versus typical natural hazard events. While SUN can improve its internal processes to help improve claims costs (with management acknowledging some deficiencies in this area), we feel the supply/demand imbalance in the repair market could take longer to work through. We also note management commentary that the issue actually escalated in November.
With the pricing environment still very competitive, this would appear to limit Suncorp's ability to respond on the pricing front without potentially losing market share.
What we think
We downgrade cash EPS by ~4% in FY16 and ~2% in FY17. Our relatively modest downgrades reflect conservatism built into our previous insurance margin estimates.
While much focus had been on the top line environment for the domestic General Insurers, the recent announcement from SUN highlights that claims pressure is also growing. With the insurance cycle having turned negative, we believe that earnings risk is to the downside. On this basis, we feel SUN's current multiple of ~12x FY16 PE is fair value.
We maintain our Hold recommendation.
More information
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