Insurance / Diversified Financials: Sector earnings changes

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
11 July 2022, 8:17 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.
  • Our sector ADD calls are QBE Insurance (QBE), Computershare (CPU), Suncorp Group (SUN), Generation Dev Group (GDG), Challenger Limited (CGF), Insurance Australia (IAG), Kina Securities (KSL) & Tyro Payments (TYR) (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 June 2022 were:

  1. Australian and major global equities indices falling by 3%-20%, with the bulk of the fall occurring in the last quarter;
  2. AUD, USD, GBP 3-year government bond yields all increasing by ~122bps-221bps for the half (+58-78bps in the last quarter);
  3. Australian 3-year corporate A-rated bond spreads widening by ~50bps; and 4) the USD strengthening by ~5-11% against both the A$ and the £ over the half.

Result period key thoughts

  • General Insurers: Reported results will be affected by known factors impacting claims during the half (e.g. lifts to hazard budgets for IAG and SUN, and Ukrainian exposure/some adverse development for QBE). All players will also see negative investment movement impacts on Shareholder funds.
  • Health Insurers: The tailwind of lower hospital claims appears to have continued in 2H22, as evidenced by the March quarter APRA industry statistics. While negative investment market movements will again affect reported NPAT results, operating profit risks arguably remain to the upside, in our view.
  • Diversified Financials: We expect CGF and CPU will deliver solid FY22 results in-line with company guidance. Recent strong interest rate increases are clearly a tailwind for CPU, although in our view, FY23 consensus (+45% NPAT growth) is increasingly factoring this in.
  • Other stocks: TYR - The market has ignored strong recent transaction growth (FY22 +34% on pcp), with the focus entirely on whether TYR can show improved operating leverage in 2H22. GDG - We forecast robust ~35% Investment Bond NPAT growth in FY22 on higher FUM which has benefitted from solid inflows. LNK – with the takeover by Dye and Durham uncertain, focus will return to the underlying business performance. LNK should deliver operating NPATA growth for the first time in years in FY23.

Earnings changes

We make a range of earnings changes across our coverage universe (Morgans clients login to view). We note recent May-June updates from CPU, CGF, SUN, QBE arguably should limit result surprises for these names, in our view.

Investment view

Our sector ADD calls are QBE, CPU, SUN, GDG, CGF, IAG, KSL & TYR (in order of preference).

We have a REDUCE recommendation on ASX. In this note we upgraded CPU and IAG to ADD recommendations, while LNK and MPL we move to Holds with upside to our price targets now reduced.

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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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