Suncorp Group: BI top up mitigated by lower claims frequency

About the author:

Richard Coles
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.

What happened

SUN has provided a group update. The key takeaways are:

  1. 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 claims frequency.
  2. 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 level.
  3. 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.

We understand 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).

Investment view

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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