Suncorp Group: BI top up mitigated by lower claims frequency
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 17 November 2020, 3:30 PM
- Sectors Covered:
- Insurance and Diversified Financials
- Suncorp Group (ASX:SUN) has provided a group update.
- Management expects COVID-19 impacts on SUN’s insurance business to be
broadly neutral in 1H21, with an extra provision top-up for business interruption
(BI) risks being offset by lower claims frequency.
- The SUN bank saw a strong credit quality performance in 1Q21 with impairment
losses of just A$3m for the quarter.
- We lift our SUN FY21F/FY22F EPS by 1%-2% respectively. This mainly reflects
slightly lower bank bad debt assumptions, post a better than expected 1Q21 credit
quality performance. Our target price rises to (login to view updated target price).
- While the near term operating environment remains difficult, we see value in SUN
at current levels with the stock trading on ~13x FY22F earnings.
SUN has provided a group update. The key takeaways are:
- COVID-19 impacts on
SUN’s General Insurance portfolio in 1H21 are expected to be broadly neutral. This
reflects the headwinds of a further provision for BI claims (A$125m pre-tax - tied to the
second Victorian lockdown) and premium waivers etc, being offset by a reduction in motor
- In the bank, SUN has pointed to a strong credit quality performance
in 1Q21, with total impairment losses of just A$3m and an unchanged collective provision
- A ‘Liability Adequacy Test’ (LAT) deficit will impact the 1H21 reported ITR
through a DAC write-down (~A$30m-A$50m), although SUN expects this impact to
somewhat reverse in 2H21.
BI provision top-up larger than we would have expected
While SUN has called out a net neutral affect for its GI business from COVID-19 in 1H21,
the additional business interruption provision being booked is larger than we expected.
Indeed, it is almost double the size of the first COVID-19 provision taken at the FY20 result
(A$70m pre-tax), which covered both initial NSW and Victorian lockdowns.
the driver of this is the harsher recent restrictions seen in Victoria (stage 4) and SUN
broadening the key industry segments covered by the provision (beyond just hotels,
restaurants and beauticians). Importantly, however, SUN is confident its revised reserving
levels (still at a 90% confidence level) are adequate to cover any potential adverse
outcomes that could eventuate from the BI test case before the NSW Court of Appeal.
Changes to forecasts
We lift our SUN FY21F/FY22F EPS by 1%-2% respectively. This mainly reflects slightly
lower bank bad debt assumptions, post a better than expected 1Q21 credit quality
performance. Our target price rises (login to view updated target price).
While the near term operating environment remains difficult, we see value in SUN at
current levels with the stock trading on 13x FY22F earnings. We think the outlook for SUN
will improve significantly in FY22 as the company reprices its insurance book and with
COVID-19 impacts having likely washed through its bank. ADD maintained.
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