Suncorp Group: Storms and flooding update
About the author:
- 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.
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).
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).
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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