Insurance/Diversified Financials: Mark-to-market
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 23 July 2019, 4:40 PM
- Sectors Covered:
- Insurance and Diversified Financials
We update our Insurance/Diversified Financials sector earnings on a mark-to-market and a review of our earnings assumptions. We see more downside risks than upside risks heading into reporting season, with the exception largely being the Health Insurers.
Summarising investment market movements
The key investment market movements for the half ended June 2019 were:
- global equity markets rising by 11%-17% for the period;
- A$ and US$ 3 year bond yields falling 7590bps, while GBP 3 year bond yields declined 18bps;
- bond spreads narrowing ~3035bps across key regions; and
- the A$ declining slightly (<1%) against the US$ and the NZ$, while being broadly flat against the pound.
Reporting season risk seem leaning to the downside
Heading into reporting season, we see sector risks as generally tilted to the downside, particularly on guidance (excluding the Health Insurers).
For Computershare (CPU) and Suncorp Group (SUN), we believe potential soft outlooks loom for FY20 with the impacts of falling bond yields being exacerbated by other factors.
These include; for CPU delayed UK Asset Resolution (UKAR) client migrations (US$35m impact) and the cycling of a very strong 1H19 margin income performance (US$125m); and for SUN absorbing a -1.6% FY20 insurance margin hit on higher catastrophe allowances/increased reinsurance.
For QBE, while the 1H19 catastrophe environment appears generally benign, a difficult US crop insurance season creates some 2H19 risks.
Changes to forecasts
We make a range of earnings changes to our coverage universe in this note (Morgans clients can login to view). For the general insurers (Insurance Australia Group (IAG), SUN and QBE), the impact of lower bond yields sees earnings fall (post FY19) by ~4%-12%.
For the health insurers, we lift our FY19 earnings forecasts (+4%-14%) reflecting positive equity market movements this half and continuing benign claims inflation trends.
Sector order preference
Our sector Add calls are Link Administration Holdings (LNK), Kina Securities (KSL), Afterpay Touch (APT), QBE Insurance Group (QBE), Zip Co (Z1P) and Suncorp Group (SUN) (in order of preference).
We have a REDUCE call on the ASX, which we see as an excellent business but too expensive trading on 32x FY20F earnings (an ~8 PE point premium to global peers).
We make a range of earnings changes across our coverage universe. Morgans clients can login to view this analysis in our recent detailed report on the Insurance/Diversified Financials sector. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer: Analyst owns shares in some companies mentioned. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.