Financial Services - Overall: Mark-to-market and sector earnings changes
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 05 January 2022, 9:30 AM
- Sectors Covered:
- Insurance, Diversified Financials
- We update our Insurance/Diversified Financials sector earnings on a mark to market and a broad review of our earnings assumptions.
- We make a range of earnings changes across our coverage universe (login for details).
- Our sector ADD calls are QBE, TYR, GDG, MME, IAG, CGF, KSL, and Z1P (in order of preference). We have a reduce recommendation on ASX.
Summary of investment market movements
The key investment market movements for the half year ended December 2021 were:
- Australian and major global equities indices rising by 3%-7%, with the bulk of the rise occurring in 4QCY21;
- AUD, USD, GBP 3 year bond yields all increasing by ~50bps for the period;
- domestic 5 year A rated bond spreads widening by 16 bps; and
- the AUD declining against the GBP, USD, and NZD by 1%-3%.
Result period thoughts
General Insurers: IAG and SUN have already disclosed weather will heavily affect their 1H22 results. For QBE, while reported claims risk s also exist, we expect the FY21 result to show further solid attritional claims ratio improvement due to increasing global insurance pricing.
Private Health Insurers (PHI): Continue to have the most favourable environment in the sector with low claims persisting due to COVID-19. The emergence of the Omicron variant of COVID-19 supports these tailwinds arguably persisting into FY23, in our view.
BNPL: The sector is suddenly unloved by investors, so solid 1H22 results are required to change sentiment. We expect strong revenue growth for APT and Z1P (~100% on pcp), but we still expect both stocks to report 1H22 NPAT losses.
Other stocks: TYR is in focus after reporting a much softer than expected 1Q22 gross profit performance. The 1H22 result will be key to providing greater clarity in this area, particularly the impact of the recent BEN Alliance on TYRs numbers.
We make a range of earnings changes across our coverage universe (login for details).
With most stocks providing recent market updates (as part of the AGM season, etc), we think most negative news items should have been flagged, although earnings visibility remains poor for several stocks, in our view (eg QBE, LNK, APT, Z1P).
The Health Insurers are seemingly the best earnings upside risk candidates, although we acknowledge the market is already factoring in robust results for these players.
Our sector ADD calls are QBE, TYR, GDG, MME, IAG, CGF, KSL, and Z1P (in order of preference). ASX is our only Reduce recommendation with the stock very expensive trading on ~36x FY22F earnings, in our view.
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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.