In this sector wrap, we highlight our key takeaways from the recent Insurance and Diversified Financials reporting season. Overall, it proved to be a strong reporting season across the board, with most company results meeting or beating expectations. While there were some disappointments—most notably NHF’s challenging results and slightly softer guidance from QBE and PXA—our focus remains on several standout picks: QBE, SUN, and CGF.
QBE Insurance Group (QBE)
QBE’s 1H24 result was broadly in-line at both Gross Written Premium (GWP) and NPAT, with the company delivering a solid 16.9% ROE (10.1% in the pcp). Overall we saw this result as largely as expected, with the negative being slightly lowered FY24 top-line guidance, and the positive being an improved overall North America business performance. We lower our QBE FY24F/FY25 EPS by 9%/5% reflecting; restructuring charges, reduced top-line growth expectations, higher tax rate forecasts and a change in QBE’s definition of adjusted NPAT. We continue see QBE as too cheap, trading on 10x FY24F PE.
Outlook commentary:
FY24 guidance is now for constant currency GWP growth of 3% (previously mid-single-digit), and a combined operating ratio of 93.5% (which is unchanged).
Suncorp Group (SUN)
SUN’s FY24 cash NPAT (A$1,372m) was ~-5% below consensus (A$1,425m), mainly due to a softer General Insurance result than expected. FY25 guidance points to solid earnings momentum continuing into this year, and we see SUN’s unveiled FY25-FY27 business strategy as uncomplicated and focused on driving the insurance business harder (which should be well received). We lift our SUN FY25F/FY26F EPS by 5-6% on an increase in insurance margin forecasts and lower “other items” forecasts.
Outlook commentary:
- GWP growth expected to be in the mid to high single digits, primarily driven by increases in AWP albeit with moderating premium rates as the reinsurance market stabilises and inflationary pressures ease slightly in some portfolios.
- Investment yields are expected to reduce as market expectations for interest rates decline in anticipation of a stabilisation in inflation. For FY25, prior year reserve releases in CTP are expected to be around 0.4% of Group net insurance revenue, with releases in other portfolios expected to be neutral over the year. An UITR towards the top of the 10% to 12% range is target.
Challenger Financial Svcs (CGF)
CGF’s FY24 normalised NPAT (A$417m) was in-line with consensus and +14% on the pcp. Overall, we saw this as a positive FY24 result highlighted by a strong improvement in Life business margins/returns, good group cost control and an upward step change in CGF’s capital position. We lift our CGF FY25F/FY26F EPS by 4%-6% on higher Life business margin expectations, and a reduction in our cost-to-income ratio forecasts. With CGF having good earnings momentum, and trading on an undemanding 12x FY25F PE multiple, we see further upside.
Outlook commentary:
- In FY25, Challenger is targeting a normalised net profit after tax guidance between $440 million and $480 million, with the mid-point of the range representing a 10% increase on FY24.
- Based on Challenger’s assumed FY25 effective tax rate of 31.3% this equates to a normalised NPBT guidance range of between $640 million and $700 million.
- Challenger has also lowered its cost to income ratio target range to 32% to 34% from FY25 (previously 35%-37%). Challenger is on track to achieve its ROE target in FY25, which represents the mid-point for the FY25 earnings guidance range.
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