Suncorp Group: Another tough first quarter

Author name:: By Richard Coles
Job title:: Senior Analyst
Date posted:: 08 November 2022, 8:00 AM
Sectors Covered:: Insurance, Diversified Financials

Suncorp Group (ASX:SUN) has disclosed natural hazard costs of A$470m-A$530m for the first 4 months of the year, versus a 1H23 hazard allowance of A$580m.
SUN does have strong reinsurance protections in place for FY23, which should help limit hazard events in the second half, if they continue.
We now forecast SUN hazard losses to be A$75m above allowances in 1H23, but assume this drag is offset by claims being below budget by a similar level in 2H23, due to reinsurance protections in place. Our SUN FY23F/FY24F EPS are altered by +1%-2% on a mark-to-market. Our SUN PT is unchanged at (login to view).
Add rating maintained; we see SUN as inexpensive trading on a 13x FY23F PE multiple and a 6% dividend yield.

What happened and key information

SUN has provided a natural hazard update for the period 1 July to 31 October 2022.

There have been 5 declared natural hazard events in Australia and NZ since the start of the financial year, which are expected to cost SUN in the range of A$470m to A$530m.

SUN’s FY23 hazard allowance is A$1.16bn, equally divided between the first and second halves.

SUN has a comprehensive reinsurance program in place for FY23. SUN’s maximum event retention on its main catastrophe program is A$250m, whilst its aggregate reinsurance cover provides $400 million of cover in excess of a retention of $850 million (for loss events >$10 million).

Key thoughts

It has been an active start to the year for claims for SUN, which is not unexpected given the recent volatile weather on the East Coast of Australia. 1H23 hazard claims of A$500m (at the mid-point) do eat up most of SUN’s 1H23 natural hazard budget (A$580m).

It’s the third year in a row that the first quarter has been difficult for the Australian general insurers. We note historically the first quarter of the year has been more benign than the second and third quarters.

If bad weather continues, SUN does have strong reinsurance protections in place that will work to limit hazard losses in the second half, as was the case in the prior year. Positively, SUN’s FY23 hazard budget (A$1.16bn) is A$180m above the FY22 level (A$980m), although SUN’s aggregate reinsurance cover attachment point is higher than in the pcp (A$850m v A$650m).

Forecast and valuation update

We now forecast SUN hazard losses to be A$75m above allowances in 1H23, but assume this drag is offset by claims being below budget by a similar level in 2H23, due to reinsurance protections in place.

Our SUN FY23F/FY24F EPS are altered by +1%-2% on a mark-to-market. Our SUN PT is unchanged at (login to view).

Investment view

While weather remains volatile, we think SUN’s underlying business trends continue to broadly track in the right direction.

SUN will also reap the full benefits of its efficiency program in FY23 and we see SUN’s current valuation as undemanding, e.g. FY23 PE multiple of 13x and a 6% dividend yield.

Risks

Downside risks to our ADD call include:

Volatile weather.
Claims inflation.
Price competition.
Negative investment market movements.
A deterioration in the overall banking environment.

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