Suncorp Group: Tough on multiple fronts
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 03 February 2020, 10:20 AM
- Sectors Covered:
- Insurance and Diversified Financials
- SUN has provided a further market update prior to its 1H20 result.
- While FY20 net natural hazards are expected to remain within SUN’s natural hazard allowance (A$820m), 1H20 reserve releases (1.3% of NEP) will be lower than normalised levels (1.5% of NEP) due to some reserve strengthening in longtail classes.
- We downgrade SUN FY20F/FY21F EPS by 3%-7% on reduced insurance margin forecasts due to lower expected reserve releases (RR). Our target price is reduced (Morgans clients can login to view detailed reports and price targets).
- Overall, it has been a terrible few months for the general insurers, with unprecedented claims events occurring. However, we feel like long-term value is re-emerging for SUN at current levels. Maintain ADD rating.
SUN has provided a further market update prior to its 1H20 result.
The key points are:
- 1H20 natural hazard costs have been reaffirmed at A$519m
- There have been three large claims events in 2H20 thus far, e.g. bushfires, hailstorms, with the costs of these events to be capped at $300m by reinsurance
- Reinsurance protections give SUN confidence at this stage that FY20 net natural hazard costs should remain inside allowances (A$820m)
- 1H20 reserve releases (RR) are expected to be between A$50m-A$70m (1.3% of NEP).
SUN confirming it still expects net natural perils to come inside budget is a good outcome, and highlights the benefits of work done in FY20 to de-risk the business.
Management’s confidence in this area seems reasonable in our view, noting SUN currently has a buffer of ~A$345m between the YTD net natural perils level (~A$675m) and the FY20 hazard allowance (A$1.02bn, inclusive of stop-loss reinsurance).
While acknowledging this buffer will have to absorb both attritional losses and any further large claims events, it will be supplemented by remaining aggregate reinsurance protection and SUN’s drop down reinsurance covers (which are all likely active/or close to active in our view).
Similar to peer IAG, SUN has put through some reserve strengthening in its Australian long-tail insurance book (on rising bodily injury claims), while also topping up NZ claims provisions.
While noting SUN’s 1H20 RR (1.3% of NEP) are still well above IAG’s (0.1% of NEP), and that management expects higher RRs in 2H20 (FY20 target >1.5% of NEP), provision strengthening does create concerns about potential rising claims inflation.
At the very least, SUN’s RR have dropped markedly from the FY19 level (3.8% of NEP), indicating a return to more normalised RR levels (1.5% of NEP) seems to be occurring faster than we previously estimated.
Earnings changes and investment view
We downgrade SUN FY20F/FY21F EPS by 3%-7% on reduced insurance margin forecasts due mainly to lower expected RR.
Our target price is reduced (Morgans clients can login to view detailed reports and price targets).
Overall, it has been a terrible few months for the general insurers, with unprecedented claims events occurring. However, we feel that longer-term value is re-emerging for SUN at current levels, and with >10% TSR upside on a 12-month basis, we maintain our ADD call.
Morgans clients can login to view our detailed report and price targets on Suncorp Group. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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