Suncorp Group: Storms and flooding update

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
31 March 2021, 3:00 PM
Sectors Covered:
Insurance, Diversified Financials

  • Suncorp Group (ASX:SUN) has disclosed it expects its net costs from the recent storms and flooding in NSW, South East Queensland and Victoria to be A$230m-A$250m.
  • While the event is disappointing, we expect SUN’s strong reinsurance protections (for the rest of FY21) to help limit total FY21 hazards costs to only marginally above SUN’s hazard budget (MorgansE hazards = ~A$1.02bn versus A$950m hazard budget).
  • We downgrade our SUN FY21F EPS by 3% reflecting our revised claims forecasts for the year. Our outer year forecasts are unchanged. Our SUN PT reduces (login to view).
  • We think the outlook for SUN will continue to improve into FY22 as the company reprices its insurance book and with more positive macro trends assisting the bank. Trading on 13x FY22F PE, we see SUN’s valuation as undemanding. ADD.

What happened

SUN has disclosed that the recent storms and flooding across NSW, South East Queensland, and Victoria have resulted in it receiving 7,600 claims (a number that is expected to grow).

SUN has given a preliminary assessment that its net claims costs from this event will total A$230m-A$250m.

SUN noted the majority of claims will be attributed to a single event across the three states for reinsurance purposes, and that its maximum event loss is capped at A$250m (under its reinsurance program).

Key thoughts

While this event is obviously disappointing, SUN does have strong reinsurance protections in place to buffer its earnings for the rest of FY21.

Indeed, we estimate that ~A$600m of SUN’s aggregate reinsurance deductible has been eroded, meaning the company is close to activating this reinsurance cover (which provides A$400m of reinsurance protection when hazard losses hit A$650m).

We also understand SUN has triggered its reinsurance drop down cover No.3, which provides an additional A$100m of protection for events greater than A$50m this year.

We expect these covers to help limit SUN’s FY21 hazards (currently ~A$883m MorgansE) to only marginally above SUN’s budget by year-end (MorgansE hazards = A$1.02bn versus A$950m budget).

Changes to forecasts

We downgrade our SUN FY21F EPS by 3% reflecting our revised claims forecasts for the year. Our outer year forecasts are unchanged. Our SUN PT reduces (login to view).

Investment view

We believe SUN has weathered the COVID-19 period well, and its outlook will improve from here as SUN reprices its insurance book, as well as more positive macro trends assisting the bank.

Recent organisational structure changes (as part of SUN’s new strategy) will also drive efficiencies over the next few years, while the company has a strong balance sheet (A$1bn of excess capital). Trading on 13x FY22F PE, we see SUN’s valuation as undemanding and maintain our ADD recommendation.

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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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