Reinsurance pain, premium gain

COMPANY UPDATE

Need To Know

• FY24 reinsurance program comes with higher costs, lower coverage, additional capital charges for SUN
• Margin guidance of 10-12% maintained, which implies another year of strong premium growth in FY24.
• SUN is entering an earnings sweet spot, with strong premium growth and increasing prospects of falling claims costs and the potential easing of weather-related claims. Maintain the Buy.

SUN’s FY24 reinsurance program (insurance for the insurers) fits a familiar theme we have seen over the last few years. The global reinsurers are lifting prices, reducing coverage, and increasing the ‘excess’ an insurer needs to pay. Today’s announcement from SUN is no different.

SUN has not disclosed the actual dollar cost, but the reduction in coverage is clear. Relative to FY22, maximum event retention lifts from $250m to $350m. Dropdown cover for subsequent events in Australia, sees retention lift from $100m to $150m.

In New Zealand, SUN also faces higher reinsurance costs, whilst offering less cover (a reflection of risk-averse reinsurance following the Auckland floods and Tropical Cyclone Gabrielle). In short, SUN shareholders will be exposed to greater earning volatility in the FY24 reinsurance package vs the FY23

SUN will attempt to offset higher reinsurance costs with higher premiums. SUN’s guidance for a 10-12% underlying insurance margin remains in place (market at 11% for FY24E). In our view, industry conditions remain favourable for further repricing of General Insurance policies. The market is currently estimating ~5.5% premium growth for SUN vs IAG at 7.5%, suggesting upside risk for SUN.

Investment View

SUN is the cleanest way to play the recovery in the domestic insurance industry, where profitability has halved in recent years. The industry has been through a rough couple of years following COVID and several large claim events, including La Nina weather events.

Rising domestic inflation is giving the industry the ability to put through strong pricing gains to help offset rising claim and reinsurance costs. History suggests that the industry can hang on to these price gains once inflation fades. Higher interest rates on SUN’s investment portfolio are likely to be beneficial to earnings in FY24E. 

SUN has held market share relative to IAG which has been caught up in a range of company-specific issues.

Upside risk to market earnings estimates for FY24E looks increasingly likely. The key catalyst in 2023 is the pending sale of the Bank asset for ~$4bn to ANZ, which would open the door for capital management

With earnings and dividend recovery expected in FY24E, SUN trades on PER multiple of 12x, half a standard deviation below its long-term average of 14.5%. We maintain our BUY rating on SUN.

Figure 1: SUN EPS momentum vs share price