Reinsurance Covers Suncorp, Yet Risks Remain

This story features INSURANCE AUSTRALIA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: IAG

Claims and property losses in the 2019/2020 bushfires so far have now exceeded the Black Saturday event in 2009 and brokers assess the risks to the outlook for Suncorp, and fellow insurers.

-Suncorp's purchase of comprehensive reinsurance could now be in its favour
-Reinsurers may question participation in comprehensive large-event cover
-Cost of renewal could create a headwind to Suncorp's net profit in FY21

By Eva Brocklehurst

Claims and property losses resulting from Australia's recent bushfires have now exceeded those of the Black Saturday event in February 2009, although the overall cost per claim is lower, the Insurance Council of Australia has reported. The average cost per claim has risen to around $89,000 which is still lower than the national average of $107,000 since 1994 and $101,000 since 1983.

Insurance Australia Group ((IAG)) now expects total net peril costs for the first half of FY20 to be $400m, or $80m above its $320m allowance. Bushfire events that commenced in December and extended into January 2020 are expected to be covered by the insurer's 2019 aggregate reinsurance protection and this should limit further downside risk.

Meanwhile, Suncorp ((SUN)) has indicated bushfire-related claims in the year to date are set to cost -$315-345m. Suncorp has reported receipt of 2600 claims relating to the fires.

That said, Bell Potter points out comparing the average net cost per claim for the two insurers is unlikely to be that meaningful, given differing insurer reviews as to what constitutes a claim, e.g. home and contents claims can be considered as either one or two claims, as well as a lack of consumer and business disclosures.

However, the broker assesses Insurance Australia Group appears to have a better track record in managing perils allowances because of its more extensive use of the quota share. Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating for both stocks with a target of $8.40 for Insurance Australia Group and $14.80 for Suncorp.

Suncorp Catastrophe Budget

Some time ago Suncorp upgraded its FY20 catastrophe budget, which positions it reasonably well to withstand the impact of the bushfire losses, Morgan Stanley asserts. The additional benefits from a group reinsurance aggregate stop-loss cover has lifted the ultimate budget to $1.02bn.

At this stage, the company has not called on the $250m maximum event retention from a first event but ongoing claims for the fires in Victoria/NSW and Tasmania could trigger this, the broker notes.

Credit Suisse points out, despite a likely miss to expectations in the first half, Suncorp is still protected in the second half, and probably will be within its $820m allowance for FY20, while the purchase of comprehensive reinsurance protection, criticised at the time, could now rescue the insurer.

With reinsurance assisting to limit costs for large events, the main risk in the second half for Suncorp is an aggregation of small natural hazard events. Credit Suisse assesses there is headroom for just under $350m in small hazard claims in the second half which, if the total were to be reached, would be the worst half on record.

The broker ascertains reinsurers are likely to be less happy about their position, and may question if participating in such cover ever really makes any money. In order to renew this reinsurance structure in FY21, Suncorp will have to fork out an additional -$50-100m, in the broker's assessment, which will fall straight to the bottom line and create a -5% headwind to net profit. Credit Suisse continues to envisage -5-10% downside risk to forecasts.

Ord Minnett considers Suncorp reasonably well protected in terms of natural peril claims, and able to manage its costs within allowances, but remains cautious about the general trend in underlying margins, given an environment of lower interest rates, high reinsurance costs and efforts to correct poor volume trends.

FNArena's database has three Buy ratings, one Hold (Ord Minnett) and three Sell ratings for Suncorp. The dividend yields on FY20 and FY21 forecasts are 5.6% and 5.5% respectively. The consensus target is $13.38, suggesting 0.9% upside to the last share price. Targets range from $12.10 (Morgan Stanley) to $14.50 (Citi, yet to comment on the insurer's update).

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