Suncorp Group: Flood events broadly contained

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

17 March 2022, 8:00 AM

Sectors Covered:

Insurance, Diversified Financials

• Suncorp Group (ASX:SUN) has given an update on the impact of the recent East Coast rain and floods. Total event costs are still expected to be around A$75m, while SUN has marginally lifted its natural hazard allowance for FY22 (A$1.1bn vs A$1.075bn previously).
• We make minor downgrades to SUN FY22F EPS of ~2% due to the slightly higher hazard budget, but we make no changes to future year earnings. Our target price falls marginally to (login to view).
• Maintain ADD recommendation. While FY22 has been tough for SUN, we see upside on solid current underlying business momentum and SUN’s cost-out plan into FY23. Trading on ~12.5x FY23F PE and a ~6% dividend yield, we see SUN as reasonable value at current levels.

Event

SUN has given an update on the impact of the recent East Coast rain and floods. SUN noted this event consisted of 4 different storm systems and will therefore constitute 4 different events for reinsurance.

SUN said the expected total net loss from the rain/floods remains unchanged at ~A$75m (reflecting the benefit of SUN’s reinsurance protections).

SUN has now slightly adjusted its FY22 natural hazard budget to A$1.1bn (previously A$1.075bn).

On SUN’s remaining reinsurance covers for FY22, SUN noted it had: 1) $150m of its original AXL $450m cover remaining; 2) the full limit of the additional 50% additional $150m AXL cover purchased in the first half; and 3) ~$300m of existing cover under the three drop-down reinsurance covers (with various amounts remaining under each).

SUN has said total FY22 natural hazard costs are currently A$958m versus the full year hazard allowance of A$1.1bn.

Key points

SUN has indicated its revised FY22 hazard budget (A$1.1bn) factors in continuing La Nina conditions, and per the company’s modelling, management does not expect SUN to go through its remaining A$150m AXL cover.

While this analysis is obviously difficult to challenge from the outside, the remaining hazard budget and reinsurance covers (on face value) seem to position SUN well into year end, in our view.

We expect recent bad weather to see a continuation of SUN putting through solid price increases near term, noting recent SUN home rate increases have been ~10%. This should be favourable for GI margins into FY23, despite SUN facing likely higher reinsurance costs (noting reinsurance is ~12% of the GI top line).

On reinsurance capacity, SUN noted there remains “lots of interest and capacity” in the Australian market, although management said the market is different for renewals versus new business.

While SUN believes its best-in-class claims program positions it well to manage the current large claims volumes it is experiencing, potential claims inflation is the area we will be watching most closely.

Forecast and valuation update

We make minor downgrades to SUN FY22F EPS of ~2% due to the slightly higher hazard budget, but we make no changes to future year earnings. Our target price falls marginally to (login to view).

Investment view

Clearly FY22 has been a difficult year for SUN with bad weather, but we think underlying business trends have been solid (particularly robust top-line growth in both the insurance and banking businesses). SUN is also well poised to reap the full benefits of its efficiency program in FY23.

Trading on ~12.5x FY23F PE and a ~6% dividend yield, we see SUN as reasonable value at current levels.

Risks

Downside risks to our ADD call include:

1. Volatile weather;
2. Claims inflation;
3. Price competition;
4. Negative investment market movements; and 
5. A deterioration in the overall banking environment.

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