Financial Services – Overall: Mark-to-market and sector earnings changes

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
20 January 2020, 10:55 AM
Sectors Covered:
Insurance and Diversified Financials

  • We update our Insurance/Diversified Financials sector earnings on a mark-to-market and a broad review of our earnings assumptions.
  • Bushfires will impact IAG and SUN’s 1H20 results, but it remains difficult to completely assess the full year impacts.
  • We make a range of earnings changes across our coverage universe (Morgans clients can login to view full details).
  • Our sector ADD calls are LNK, APT, GDG, KSL, SUN and MAI (in order of preference). We have recently initiated coverage on MME with an ADD rating. ASX is the one REDUCE call in our coverage.

Summarising investment market movements

The key investment market movements for the half year ended December 2019 were:

  1. Australian equity markets rising mildly (~2%) versus generally stronger positive moves offshore (MSCI +9%)
  2. A$, US$, GBP 3 year bond yields falling marginally (5-15bps)
  3. a general contraction in bond spreads globally (~8-20bps)
  4. the GBP strengthening ~4% against both the US$ and AUD. 

Bushfire impacts and thoughts for IAG and SUN 

Per January company updates, the impacts from recent bushfires will see Insurance Australia Group (ASX:IAG) and Suncorp Group (ASX:SUN) produce claims above allowances in 1H20 (A$80m and A$109m respectively).

In our view, the rolling nature of current bushfires makes it difficult to completely assess the full year impacts, but we make the following observations:

For IAG – the company still achieved a full year result in the middle of guidance in the prior year, despite a similar adverse claims outcome at 1H19.  Further, IAG has said its 2019 calendar year aggregate reinsurance program will cover bushfire events starting in December that extended into January 2020. 

For SUN - at this stage, we think the significant lifting of SUN’s natural hazard allowance (+A$100m), and the strengthening of its reinsurance protections in FY20 (particularly adding a ~A$200m stop-loss cover) mean claims could arguably still be around allowance levels for FY20.

Changes to forecasts and result expectations 

We make a range of earnings changes across our coverage universe.

With numerous stocks having pre-released, we don’t expect huge surprises in the Insurance/Diversified Financials reporting season. 

We retain some caution on results for:

  • private health insurers (given recent claims inflation)
  • Link Administration (ASX:LNK) (UK exposure, challenging FY20 guidance)
  • Zip Co (ASX:Z1P) (potential growth impacts on reported margins).

We see potential upside for KSL and GDG, while expecting continued improved underlying business trends for QBE.

Sector order of preference

Our sector ADD calls are Link Administration (ASX:LNK), Afterpay (ASX:APT), Generation Development Group (ASX:GDG), Kina Securities (ASX:KSL), Suncorp Group (ASX:SUN) and Mainstream Group Holdings (ASX:MAI) (in order of preference).

We have also recently initiated coverage on MoneyMe (ASX:MME) with an ADD rating.

We have a REDUCE call on the ASX, which we see as an excellent business but too expensive trading on 32x FY20F earnings (given a mid-single-digit EPS growth profile).  

More information

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 Financial Services 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.

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