Insurance stocks like QBE (ASX: QBE), Insurance Australia Group (ASX: IAG) and Suncorp (ASX: SUN) are trading around multi-year highs thanks to tailwinds such as rising interest rates and growth in gross written premiums (GWP).
Ahead of August reporting season, Macquarie says there is possible upside risk to GWP growth for both IAG and Suncorp. The strength of the premium rate environment is expected to bolster earnings and provide a “respite against inflationary headwinds.”
“With the prospect of an El Nino providing respite from heavier insurance losses for the next 12 months, we maintain Outperforms on IAG and SUN,” the analysts said in a note last Friday.
“We believe the upcoming results for IAG and SUN will focus on different issues. For IAG, the focus will be on FY24 margin guidance, while for SUN it will be on Motor claims inflation trends.”
IAG shares are up around 12% in the past month, 20.6% year-to-date, and are trading at levels not seen since June 2020.
Target price: $5.80
Valuations: IAG currently trades at a two-year forward PE of 14.6x. Whereas insurance companies with similar reinsurance structures globally trade at around 18.8x.
FY24 perils allowance: IAG have not provided guidance for their FY24 perils allowance, which was $909m in FY23. Macquarie forecasts $1.15bn in FY24.
FY24 margin guidance: IAG have not provided guidance for their FY24 margins. Macquarie anticipates an FY24 guidance of 14-16% against consensus expectations of 14.8%.
Business interruption (BI): IAG is unwinding its BI provision, which is expected to provide one-off benefits for its margin target in the short term. The BI provision was $606m at 31 December 2022, and Macquarie expects a further $300m to be released at the 2H23 result.
GWP growth: IAG have guided to ~10% GWP growth in FY23 vs. Macquarie expectations of 10.1%.
Suncorp shares are up around 2% in the past month, 10.7% year-to-date and trading at levels not seen since January 2020.
Target price: $16.60
Motor claims inflation: IAG’s recent investor day said they were achieving 6-7% Motor claims inflation for the 6 months to April 2023. Macquarie anticipates Suncorp to comment that their Motor claim trends are higher than IAG.
FY24 margin guidance: Suncorp’s July trading update stated FY24 margins of 10-12%. Macquarie forecasts 11.3% in FY24 vs. consensus expectations of 11.5%.
FY23-24 hazards: FY23 hazards allowance is expected to come in at the midpoint of Suncorp’s $1.25-1.28bn guidance.
GWP growth: Suncorp have guided to mid-to-high single digit GWP growth in FY23. Macquarie remains above consensus with forecasts of 9.6% and 7.6% for FY23-24 (vs. 8.9% and 6.9% consensus)
Cost base: Suncorp has guided to a $2.7bn cost base in FY23 and have a track record of achieving their cost targets. But Macquarie expects costs to come in above guidance, at $2.75bn, reflecting a “higher inflationary environment.”
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