Financial Services: Reporting season wrap

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

10 March 2023, 7:30 AM

Sectors Covered:

Insurance, Diversified Financials

• We summarise our key takeaways from the Insurance and Diversified Financials reporting season.
• We saw the strongest sector results come from QBE, MPL, CGF and TYR, whilst IAG, NHF, PXA and GDG’s results disappointed versus market expectations.
• Our sector ADD calls are QBE Insurance Group Ltd (ASX:QBE), Computershare Ltd (ASX:CPU), Suncorp Group Ltd (ASX:SUN), Tyro Payments Ltd (ASX:TYR), Generation Development Group Ltd (ASX:GDG), PEXA Group Ltd (ASX:PXA) and Kina Securities Ltd (ASX:KSL) (in order of preference).

General Insurers – QBE the standout, SUN comparatively strong versus IAG

Of the General Insurers (GI) QBE had the strongest reporting season performance, in our view, highlighted by the company delivering 13% FY22 GWP growth and a solid improvement in its key adjusted combined operating ratio (93.7% versus 95% in the pcp).

However, it was QBE’s solid outlook commentary that served as the key stock catalyst, in our view, with the company guiding to an impressive mid-teens ROE in FY23, on an expected solid underwriting result (guidance = 93.5%) and the benefits of higher interest rates (FY22 fixed income exit running yield of 4.1%, versus 0.7% in the pcp).

We saw the other key GI sector result takeaway as being the relatively favourable 1H23 underlying insurance margin performance of SUN (10%, flat on 2H22) versus IAG (10.7%, but a -3.5% UIM sequential decline on 2H22).

Heath Insurers – Still a sector with tailwinds

Both MPL and NHF continue to deliver strong results in their core domestic Health Insurance (HI) franchises, with the recent favourable claims environment continuing in 1H23. However, whilst MPL’s HI underlying operating margin slightly improved on the pcp (8.1% vs 7.9%), NHF’s ARHI business saw its net margin decline (8.6% versus 10.6% in the pcp) raising some concerns about the potential speed of profit normalisation in this business.

We saw the other key HI sector takeaways as: 1) while MPL lifted the expected costs of its cyber security incident (A$40m-A$45m versus A$25m-A$35m previously), we see potential negative outcomes as looking increasingly contained; and 2) NHF saw a much improved performance on the pcp from its Covid-19 affected businesses (IIHI and NIB travel), as they benefitted from borders reopening.

Diversified Financials – Large caps

We saw CGF’s 1H23 result as showing generally good momentum in its key Life business, highlighted by 1H23 retail annuity sales (A$1.8bn) being +94% on the pcp and the 1H23 Life COE margin improving on the pcp (2.76% vs 2.56%), due to higher returns on shareholder funds.

For CPU, 1H23 EPS growth (+95% on the pcp) puts the company well on track to deliver against full year guidance (~+90% EPS growth), and we see CPU’s current rapid de-leveraging (1H23 leverage ratio of just 1.33x) as creating significant optionality going forward.

Diversified Financials – Small to mid caps

TYR’s 1H23 result impressed overall, in our view, punctuated by a maiden positive NPAT result (A$1.1m versus -A$18m in the pcp), and the company reaching positive free cashflow ahead of schedule (the original aim was to exit FY23 in this position).

For PXA, a strong result from the key PEXA Exchange business was overshadowed by higher costs tied to growth initiatives, and management seemingly pointing to a slower build out of PXA’s UK franchise in 2023 than previously envisaged.

Sector order of preference

Our sector ADD calls are QBE, CPU, SUN, TYR, GDG, PXA and KSL (in order of preference).

We include individual stock investment views in more detail overleaf (login to 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.