Financial Services - Reporting season wrap

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

02 September 2022, 9:00 AM

Sectors Covered:

Insurance, Diversified Financials

• We summarise our key takeaways from the Insurance and Diversified Financials reporting season.
• The strongest results across our coverage universe came from the Health Insurers, QBE, TYR, and GDG. SUN and CGF arguably had the softest performances, with SUN’s FY22 total divisional profit and group excess capital level being below market expectations, while CGF’s FY23 guidance disappointed.
• Our sector ADD calls are QBE Insurance Group (ASX:QBE), Computershare (ASX:CPU), Suncorp Group (ASX:SUN), Generation Development Group (ASX:GDG), Tyro Payments (ASX:TYR), Challenger (ASX:CGF) and Kina Securities (ASX:KSL) (in order of preference). 

General Insurers – Messy reported results conceal underlying improvements

As expected, the General Insurers’ (GI) reported results were messy, affected by bad weather and negative investment market movements.

Generally, however, we believe the sector’s underlying business trends improved overall, highlighted by:

1. Robust GWP growth for all companies on the pcp (QBE +18%, SUN +11%, and IAG +6%).
2. Expanding underlying insurance margins this half versus the sequential period (QBE ~+2%, IAG +0.8%, and SUN +1%).
3. Rising interest rates lifting underlying investment yields, e.g. IAG’s 2H22 yield on technical reserves of 2.4% versus 1.1% in 1H22, while QBE’s 1H22 fixed income exit yield of 2.49% compared to 0.68% at FY21. 

In our view, QBE had the best overall result, producing the largest top-line growth and underlying margin expansion. SUN had the softest result, with its FY22 total divisional profit below consensus (-5%) and the group’s excess CET1 capital level declining materially in 2H22 (A$82m versus A$773m at FY21, post dividend - albeit A$400m of this should reverse over time). 

Diversified Financials – Small caps – TYR the positive surprise  

TYR delivered the key positive result surprise in our small caps coverage universe.  The company finally showing evidence of improving operating leverage highlighted by an improved 2H22 EBITDA performance (A$8m versus A$2m in 1H22) and more particularly above consensus FY23 EBITDA guidance (A$23m-29m versus A$22m consensus).

TYR is now targeting being free cash flow positive exiting FY23.  Of the other key stock names, GDG continues to impress delivering a clean set of FY22 numbers, including +59% underlying NPAT growth on the pcp. 

Sector order of preference

Our sector ADD calls are QBE, CPU, SUN, GDG, TYR, CGF, and KSL (in order of preference). We include our individual stock investment views in more detail overleaf, but call out the following key points:

1. QBE remains the cheapest of the General Insurers (FY23F PE of ~9x versus 12x/14.5x for SUN/IAG).
2. While the Health Insurers have clear momentum, we see both stocks as now trading closer to fair value given cyclically high earnings (FY23F PEs of ~20x respectively).
3. CPU expects yield curve benefits to provide a positive margin income delta of +A$333m in FY23 and +US$50m-US$75m in FY24. 

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You can find further detailed analysis of company results this reporting season by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.

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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.