Insurance - General: Victorian storms update

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
17 June 2021, 5:30 PM
Sectors Covered:
Insurance, Diversified Financials

  • Insurance Australia Group (ASX:IAG) and Suncorp Group Ltd (ASX:SUN) have both provided an update on FY21 natural hazard claims costs following the severe storms and flooding that impacted parts of Victoria last week.
  • Broadly, both insurers now appear likely to come in between A$50m-A$100m above their original FY21 natural hazard allowances.
  • We lower our IAG FY21F EPS by ~9%, with no changes to other future year earnings. Our SUN forecasts are unaltered, with our previous earnings estimates already allowing for natural hazard costs A$80m above allowances.
  • We maintain an ADD call on IAG and move SUN back to a Hold recommendation. This reflects SUN’s strong share price rise over the last month (>10%), which has reduced the upside to our valuation.

Victorian Storms update

Insurance Australia Group (ASX:IAG) and Suncorp Group Ltd (ASX:SUN) have both provided an update on FY21 natural hazard claims costs following the severe storms and flooding that impacted parts of Victoria last week.

IAG now expects its FY21 net natural hazard losses to be approximately A$720m to A$743m versus its previous FY21 guidance of A$660m to A$770m (IAG’s original FY21 natural hazard budget was A$658m).

SUN has indicated that its natural hazard costs at the end of May 2021 were A$955m, versus a full year hazard allowance of A$950m. SUN has said the Victoria event could cost it another A$50m, being its maximum event loss.

FY21 natural hazard claims costs above allowances for both players

Broadly both insurers appear likely to come in about A$50m-A$100m above their original FY21 natural hazard allowances.

We expect any potential slippage from these numbers to be limited, with only several weeks left in the half and given the remaining reinsurance protections in place for both players.

Change to forecasts

We lower our IAG FY21F EPS by 8%, with no changes to future year earnings. Our IAG earnings changes, however, are more than offset by a valuation roll-forward, which increases our price target to (Login to view). Our SUN forecasts and price target (Login to view) are unaltered, with our previous earnings estimates already allowing for claims A$80m above allowances.

Investment view

We maintain an ADD call on IAG and move SUN back to a Hold recommendation. This reflects SUN’s strong share price rise over the last month (>10%), which has reduced the upside to our valuation.

Our ADD call on IAG is premised on an undemanding valuation (~16.5x FY22F PE), expected future margin improvement as price increases roll through IAG’s book and the potential for COVID-19 provision releases over the medium term.

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Disclaimer: 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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