Insurance Australia Group (IAG) and Suncorp (SUN) have provided initial estimates of claim costs from the Australian bushfires and an update on their reinsurance cover.
IAG estimates natural perils costs for 1H20 at $400m post quota share, compared to its allowance of $320m ($641m for FY20). This includes allowance for bushfires and hailstorm events in Queensland and Timaru, New Zealand. Most claims it has received relate to residential properties. There are still ongoing bushfires, although the three key ones have been capped under the aggregate covers. IAG estimated the cost of bushfires in 1H20 at $160m post quota share.
IAG has an FY20 natural perils allowance of $641m post quota share and is tracking at $400m in 1H20, with some bushfires still raging. However, it said a lot of the costs from ongoing bushfires would be picked up by the CY19 aggregate protection. IAG has a stop-loss protection for natural perils that kicks in with $101m of additional cover, about $34m above its allowance. If the 2H20 perils outcome is in line with budget, then the overall budget would be $34m above its FY20 allowance, that is, annual outcomes would be better than 1H20 outcomes.
Suncorp has less exposure to NSW than IAG (it is more exposed to Queensland). Assuming an average 2H20 period of events, we believe Suncorp should be able to manage its net natural perils cost within its allowances. We note $159m of Suncorp’s attritional claims were taken in 1H20 and, assuming an average cost of attritional claims of $175m for 2H20, this would take its retained natural perils cost to $694m ($519m plus $175m) for FY20. Further, assuming conservatively that $105m is allocated to the bushfires in 2H20, this implies a total cost of $694m plus $105m, which equals $799m, versus its allowance of $820m for FY20, leaving about $21m to cover the impact from net retained perils above $10m for 2H20.
Suncorp has catastrophe reinsurance limiting its loss for a single event to a maximum of $250m, as well as dropdown protection, $300m of aggregate protection with the deductible amount close to being eroded, and $200m of stop-loss protection above its allowances. This provides reinsurance support that should help Suncorp manage the cost to within its allowances assuming an average year for events.
We maintain a Hold recommendation on both IAG and Suncorp, with unchanged target prices of $7.10 for IAG and $13.12 for Suncorp.