General Insurance Note$

Transcription

1 22 September 216 Analyst TS Lim Authorisation Chris Savage General Insurance Note$ Hasta la vista El Nino Stock Price Target Rating 1. SUN $12.41 $14.25 Buy 2. IAG $5.44 $6. Buy 3. QBE $9.58 $1.65 Buy Big Dry ending but balmy summer likely The Southern Oscillation Index (SOI) has recently turned positive and signals the end of El Niño. However, the Bureau of Meteorology s current outlook is still for a neutralto-weak La Niña and the most recent survey of international climate models suggests any La Niña in late spring or summer would be potentially short-lived and well below the strength of the significant event. This would be good for general insurers as we head into the tropical cyclone season where incidents also appear lower in a neutral-to-weak La Niña phase. There have only been three weak-moderate La Niña phases since Each is associated with a handful of CAT events that are not related to cyclones further noting the smaller number of severe cyclones (defined as <97hPa central pressure or Category 3-5, making landfall and costing >$5m) relative to non-severe ones in the period. Hailstorms are generally associated with La Niña and there is always the possibility of a few CAT-sized ones in summer. However, inspection of historical data suggests a lower number of such hailstorms in a weak-moderate La Niña phase (conversely more in a moderate-strong phase, e.g. Sydney event in April 1999). J43 Price Performance (1m) (3m) (12m) Price (A$) Absolute (%) Rel market (%) Absolute Price Sep DecMar Jun Sep Dec Mar Jun J43 S&P 3 Rebased SOURCE: IRESS We have also looked at the relationship between SOI, rainfall and share price movements. There appears to be a stronger inverse relationship between SOI and insurer share prices (QBE excluded for geographic reasons) up until mid-213. The subsequent de-coupling (share price starting to move in tandem with higher SOI and thus higher La Niña tendencies) is possibly explained by repricing potential (insurers perversely do better in bad weather), better reinsurance arrangements (volume and price), productivity and efficiency gains, and better investment mix to improve returns in a low rate environment. Unlike recent SOI readings, rainfall in Sydney and Brisbane is still reasonably correlated with IAG and SUN share price movements think leaky roofs and flooding irrespective of cyclones. The pattern appears stronger for IAG and SUN in Sydney perhaps because of greater population and housing densities while SOI appears more correlated with Brisbane rainfall. IAG and SUN share prices also appear to move in tandem since mid-213. General insurers ahead of the major banks by a nose Our more favourable view of the general insurers relative to the major banks is based upon: (1) stable growth multiplier effect; (2) scope for repricing and improving underwriting and insurance margins; (3) fewer operating constraints; (4) higher capital, regulatory and loss buffers; (5) little dependency on expensive wholesale funding, being the beneficiaries of free funds or float; (6) few credit quality issues if any; (7) superior ROA; and (8) better resilience in any global financial crisis with pure general insurers unlikely to present any systemic threat to the financial sector/economy. Price target change: QBE price target -5% to $1.65, impacted by 4% lower revised earnings and reduced float valuation (both changes largely yield-related). Rating change: IAG is upgraded to Buy (previously Hold) purely based on valuation. BELL POTTER SECURITIES LIMITED ACN AFSL DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 18 THAT FORM PART OF IT. Page 1

2 Hasta la vista El Niño Big Dry ending but balmy summer likely While the Southern Oscillation Index (SOI) has recently turned positive and signalled the end of El Niño (generally drier conditions), the Bureau of Meteorology s current outlook is still for a neutral-to-weak La Niña (generally wetter conditions). This is based on a survey of eight international climate models that suggests any La Niña in late spring or summer would be potentially short-lived and well below the strength of the significant event (see Figure 1, compared with more manageable CAT costs in 27-9). A neutral-to-weak La Niña would be good for insurers as we also head into the tropical cyclone (TC) season that runs from 1 November to 3 April. While tropical cyclones are usually more prevalent during La Niña, the season saw fewer numbers (although more intense, e.g. TC Tasha, TC Yasi and Ex-TC Oswald) compared with the long term 47-year average of 11 per year (11 in 21, 11 in 211 and 5 in 212). There have only been three weak-moderate La Niña phases since 1969 (Figure 2, next page). Each is associated with a handful of CAT events that are not related to cyclones further noting the smaller number of severe cyclones (defined as <97hPa central pressure or Category 3-5, making landfall and costing >$5m) relative to non-severe ones in the period. Hailstorms are generally associated with La Niña and there is always the possibility of a few CAT-sized ones in summer. However, inspection of historical data suggests a lower number of such hailstorms in a weak-moderate La Niña phase (conversely more of these in a moderate-strong phase, e.g. Sydney event in April 1999). Figure 1 CATs and La Niña ICA disaster (original) costs vs. Southern Oscillation Index 3, 2, 1, VIC/SA hail, NSW storms NSW/QLD storms NSW, Sydney hail NSW/ACT/ VIC bushfires NSW/TAS/ VIC hail, storms NSW/VIC storms VIC bushfires QLD/VIC/WA storms, floods ETC Oswald, QLD/NSW storms, floods, TAS bushfires Brisbane hail TC Marcia, SA bushfires NSW/QLD storms, Sydney hail Storms, bushfires ($m) -1, Sydney hail NSW hail TC Larry NSW/QLD hail, storms, floods QLD/VIC storms, floods, TC Yasi, WA bushfires NSW bushfires East coast low -8-2, Shaded areas: weakmoderate La Nina WA gas explosion QLD storms QLD/VIC storms, floods, WA bushfires , Jan 91 Jun 91 Nov 91 Apr 92 Sep 92 Feb 93 Jul 93 Dec 93 May 94 Oct 94 Mar 95 Aug 95 Jan 96 Jun 96 Nov 96 Apr 97 Sep 97 Feb 98 Jul 98 Dec 98 May 99 Oct 99 Mar Aug Jan 1 Jun 1 Nov 1 Apr 2 Sep 2 Feb 3 Jul 3 Dec 3 May 4 Oct 4 Mar 5 Aug 5 Jan 6 Jun 6 Nov 6 Apr 7 Sep 7 Feb 8 Jul 8 Dec 8 May 9 Oct 9 Mar 1 Aug 1 Jan 11 Jun 11 Nov 11 Apr 12 Sep 12 Feb 13 Jul 13 Dec 13 May 14 Oct 14 Mar 15 Aug 15 Jan 16 Jun Cost (LHS) SOI (6m moving average, RHS) SOURCE: BOM, ICA AND BELL POTTER SECURITIES ESTIMATES Page 2

3 Figure 2 Cyclones and La Niña $12m $2m (Tracey) $2m Number of tropical cyclones vs. weak-moderate La Niña $13m $25m $2m $4m $2m $26m $65m Shaded areas: weakmoderate La Niña $11m $71m $168m (Justin) $35m $26m $34m $8m $54m (Larry) $3,18m (Yasi etc.) $395m (Tasha, etc.) $987m (ETC Oswald) $656m $13m $14m (Marcia, Olwyn, Lam) $8m $34m 4 $9m Severe (LHS) (CAT events, cost >$5m) Non-severe (LHS) SOURCE: BOM, ICA AND BELL POTTER SECURITIES ESTIMATES SOI and share price decoupling after mid-213 Further inspection suggests a stronger inverse relationship between SOI and insurer share prices (QBE excluded for geographic reasons) up until mid-213. The subsequent decoupling (share price starting to move in tandem with higher SOI and thus higher La Niña tendencies) is possibly explained by repricing potential (insurers perversely do better in bad weather), better reinsurance arrangements (volume and price), productivity and efficiency gains, and better investment mix to improve returns in a low rate environment. Figure 3 SOI vs. IAG Figure 4 SOI vs. SUN 25 Southern Oscillation Index vs. IAG share price movement 8% 3 Southern Oscillation Index vs. SUN share price movement 15% % 4% 2% 2 1 1% 5% % % % -4% -6% % -1% -25 Jun 6 Aug 6 Oct 6 Dec 6 Feb 7 Apr 7 Jun 7 Aug 7 Oct 7 Dec 7 Feb 8 Apr 8 Jun 8 Aug 8 Oct 8 Dec 8 Feb 9 Apr 9 Jun 9 Aug 9 Oct 9 Dec 9 Feb 1 Apr 1 Jun 1 Aug 1 Oct 1 Dec 1 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16-8% -3 Jun 6 Aug 6 Oct 6 Dec 6 Feb 7 Apr 7 Jun 7 Aug 7 Oct 7 Dec 7 Feb 8 Apr 8 Jun 8 Aug 8 Oct 8 Dec 8 Feb 9 Apr 9 Jun 9 Aug 9 Oct 9 Dec 9 Feb 1 Apr 1 Jun 1 Aug 1 Oct 1 Dec 1 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16-15% SOI (6m moving average, LHS) IAG (6m moving average, RHS) SOI (6m moving average, LHS) SUN (6m moving average, RHS) SOURCE: BOM, IRESS AND BELL POTTER SECURITIES ESTIMATES SOURCE: BOM, IRESS AND BELL POTTER SECURITIES ESTIMATES Page 3

4 Rain and share price movements Unlike recent SOI readings, rainfall in Sydney and Brisbane is still reasonably correlated with IAG and SUN share price movements think leaky roofs and flooding irrespective of cyclones. The pattern appears stronger for IAG and SUN in Sydney perhaps because of greater population and housing densities while SOI appears more correlated with Brisbane rainfall. IAG and SUN share prices also appear to move in tandem since mid-213. Figure 5 Sydney rainfall (mm) vs. IAG Figure 6 Brisbane rainfall (mm) vs. IAG 16 Sydney rainfall (Observatory Hill) vs. IAG share price movement 6% 35 Brisbane rainfall vs. IAG share price movement 6% % 4% 3% % 4% 3% % 1% % -1% % 1% % -1% 4-2% 1-2% 2-3% -4% 5-3% -4% Jun 6 Aug 6 Oct 6 Dec 6 Feb 7 Apr 7 Jun 7 Aug 7 Oct 7 Dec 7 Feb 8 Apr 8 Jun 8 Aug 8 Oct 8 Dec 8 Feb 9 Apr 9 Jun 9 Aug 9 Oct 9 Dec 9 Feb 1 Apr 1 Jun 1 Aug 1 Oct 1 Dec 1 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16-5% Jun 6 Aug 6 Oct 6 Dec 6 Feb 7 Apr 7 Jun 7 Aug 7 Oct 7 Dec 7 Feb 8 Apr 8 Jun 8 Aug 8 Oct 8 Dec 8 Feb 9 Apr 9 Jun 9 Aug 9 Oct 9 Dec 9 Feb 1 Apr 1 Jun 1 Aug 1 Oct 1 Dec 1 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16-5% Sydney rainfall (12m moving average, LHS) IAG (12m moving average, RHS) Brisbane rainfall (12m moving average, LHS) IAG (12m moving average, RHS) SOURCE: BOM, IRESS AND BELL POTTER SECURITIES ESTIMATES SOURCE: BOM, IRESS AND BELL POTTER SECURITIES ESTIMATES Figure 7 Sydney rainfall (mm) vs. SUN Figure 8 Brisbane rainfall (mm) vs. SUN 16 Sydney rainfall (Observatory Hill) vs. SUN share price movement 6% 35 Brisbane rainfall vs. SUN share price movement 6% 14 4% 3 4% 12 2% 25 2% 1 % 2 % 8 6-2% 15-2% 4-4% 1-4% 2-6% 5-6% Jun 6 Aug 6 Oct 6 Dec 6 Feb 7 Apr 7 Jun 7 Aug 7 Oct 7 Dec 7 Feb 8 Apr 8 Jun 8 Aug 8 Oct 8 Dec 8 Feb 9 Apr 9 Jun 9 Aug 9 Oct 9 Dec 9 Feb 1 Apr 1 Jun 1 Aug 1 Oct 1 Dec 1 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16-8% Jun 6 Aug 6 Oct 6 Dec 6 Feb 7 Apr 7 Jun 7 Aug 7 Oct 7 Dec 7 Feb 8 Apr 8 Jun 8 Aug 8 Oct 8 Dec 8 Feb 9 Apr 9 Jun 9 Aug 9 Oct 9 Dec 9 Feb 1 Apr 1 Jun 1 Aug 1 Oct 1 Dec 1 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16-8% Sydney rainfall (12m moving average, LHS) SUN (12m moving average, RHS) Brisbane rainfall (12m moving average, LHS) SUN (12m moving average, RHS) SOURCE: BOM, IRESS AND BELL POTTER SECURITIES ESTIMATES SOURCE: BOM, IRESS AND BELL POTTER SECURITIES ESTIMATES Figure 9 SOI vs. rainfall (mm) Figure 1 IAG and SUN share price movements 6 SOI vs. rainfall 4 6% IAG vs. SUN 5 3 4% 4 2 2% 3 1 % -2% 2-4% % -2 Sep Dec Mar 1 Jun 1 Sep 1 Dec 1 Mar 2 Jun 2 Sep 2 Dec 2 Mar 3 Jun 3 Sep 3 Dec 3 Mar 4 Jun 4 Sep 4 Dec 4 Mar 5 Jun 5 Sep 5 Dec 5 Mar 6 Jun 6 Sep 6 Dec 6 Mar 7 Jun 7 Sep 7 Dec 7 Mar 8 Jun 8 Sep 8 Dec 8 Mar 9 Jun 9 Sep 9 Dec 9 Mar 1 Jun 1 Sep 1 Dec 1 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Brisbane rainfall (6m moving average, LHS) Sydney rainfall (6m moving average, LHS) SOI (6m moving average, RHS) SOURCE: BOM, IRESS AND BELL POTTER SECURITIES ESTIMATES -8% Jun 6 Aug 6 Oct 6 Dec 6 Feb 7 Apr 7 Jun 7 Aug 7 Oct 7 Dec 7 Feb 8 Apr 8 Jun 8 Aug 8 Oct 8 Dec 8 Feb 9 Apr 9 Jun 9 Aug 9 Oct 9 Dec 9 Feb 1 Apr 1 Jun 1 Aug 1 Oct 1 Dec 1 Feb 11 Apr 11 Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Dec 12 Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16 SUN (12m moving average, RHS) IAG (12m moving average, RHS) SOURCE: BOM, IRESS AND BELL POTTER SECURITIES ESTIMATES Page 4

5 Insurers ahead of the big banks by a nose Our June 216 edition of General Insurance Note$ outlined the reasons why we continue to prefer the domestic general insurers to the big banks 1. These are summarised below. To recap, the big banks engage in financial intermediation and maturity transformation. In a perfect world, they would price for risk and experience lower loan loss volatility in the long term (although the occasional single name exposure would cause some grief but that s the nature of banking). They would also benefit from: (1) no funding shortfall (i.e. all lending funded by retail deposits); (2) rising spreads given a positive yield curve that will also benefit the free fund effect; (3) non-interest income that more than offsets operating costs; and (4) optimal allocation of provisions, liquidity and capital, the latter to generate returns in excess of cost of equity. In reality, the challenges within (1)-(4) are unabated. The Australian major banks remain dependent on wholesale funding (a structural issue) and continue to face margin pressure in a low rate environment (lower for longer thematic). Non-interest income remains subdued due to competition and non-banking other income continues to be volatile (e.g. trading and life insurance). Prudential buffers continue to track upwards (although gradual) and the ability to generate excess returns is gradually constrained (theoretically returns should fall with the cost of equity but the latter outcome is not guaranteed when returns do fall from a credit strength rating point of view). General insurers are in the business of pricing, pooling and transforming risk to optimise the underwriting result. In a perfect world, they would experience: (1) uncorrelated risks that result in realised losses close to allowances (through the Law of Large Numbers ); (2) more premiums than claims; (3) a rising rate environment that would benefit investment returns (both float and shareholders funds) being the value add; (4) availability of cheap reinsurance; and (5) adequate funding and surplus capital. In reality, the general insurers continue to experience the occasional CAT that would lead to a combined ratio in excess of 1%. But 1% loss ratios are rare and the ongoing push is for a combined ratio to head towards 9% (at the minimum) given upside risk to margins and efficiency. We believe this is possible as the pricing/margin environment continues to improve and the respective cost bases haven t changed a lot since 23. Figure 11 Margins trends positive for insurers, not for banks Figure 12 Still more scope to reduce insurer costs Reported margin Reported cost to income ratios 3.% 2% 55% 2.5% 16% 5% Bank average Bank average 2.% Insurer average 12% 45% 1.5% 8% 4% 35% 1.% Insurer average 4%.5% % 3% Insurer average 25%.% H16 Average major bank margin (LHS) Average insurer margin (RHS) Average underwriter margin (RHS) -4% 2% H16 Average major bank cost ratio Average insurer cost ratio SOURCE: COMPANY DATA SOURCE: COMPANY DATA 1 General Insurance Note$: Second mouse gets the cheese. Bell Potter Securities, June 216. Page 5

6 Whether losses are from credit exposures or claims, these are normalising for the banks towards 2-3bp (although gradual) while we believe those for the general insurers have progressed further and reverted to the mean (and should be relatively benign given expectations of a neutral-to-weak La Niña this summer). Earnings stability and predictability in the general insurance space would also be supported by higher loss buffers compared to the banks (on a like-for-like basis). General insurers are not exposed to credit quality issues although each sector still faces the risk of widening credit spreads. However, there is no funding issue for the general insurers given the availability of free float and they remain better placed than the banks in our view given their superior capital, leverage and liquidity positions. Figure 13 Losses near the mean for insurers Figure 14 Bank provisions still to peak.9% Reported losses 78% 8, Loss buffers.8% 76% 7,.7% 74% 6,.6% 72% 5,.5%.4%.3% Insurer average 7% 68% 66% ($m) 4, 3,.2% Bank average 64% 2,.1% 62% 1,.% H16 6% H16 Average major bank BDD charge (LHS) Average insurer loss ratio (RHS) Average major bank provisions Average insurer reinsurance limit SOURCE: COMPANY DATA SOURCE: COMPANY DATA Finally, we reiterate the fact that general insurers that stick to their knitting (i.e. not involved in guarantees, risky CDS investments, etc.) tend to be more resilient than banks in a financial crisis and do not pose a systemic threat to the financial sector. This is based on a study of systemic risk in insurance by The Geneva Association 2 that new capital raised by insurers was only 5% of those at the major banks. Figure 15 Losses and capital raised SOURCE: THE GENEVA ASSOCIATION 2 Systemic risk in insurance: An analysis of insurance and financial stability. The Geneva Association Systemic Risk Working Group, March 21. Page 6

7 Reporting period summaries IAG Price target $6., Buy 216 reported NPAT decreased by 14% on a pcp basis to $625m. While it missed expectations by 28% at first glance, this was largely due to a higher effective tax rate of ~4% and higher software amortisation/impairment charges in 2H16 ($198m following an IT review). Excluding the latter, cash NPAT decreased by 12% on a pcp basis to $867m the smaller miss again largely due to a higher effective tax rate. However, IAG s underlying position is much stronger after stripping out the noise and despite a lower shareholder fund yield. Despite flat GWP growth, there were improvements in the insurance profit and underlying margin in part due to efficiency gains and a favourable impact from the Berkshire Hathaway quota share arrangement. While initially disappointed with the absence of a special dividend in 2H16, there is consolation in the form of a $3m share buyback. This provides a much better outcome to shareholders after taking into account the 13cps final dividend (total payment $616m vs. $511m based on our 16cps final and 5cps special dividend forecasts). We estimate the pro-forma PCA multiple as at 3 June 216 (i.e. post capital initiatives) would decrease from 1.7x to 1.5x, still comfortably within the x target range. We also estimate there is room for a further $3m buyback next year. IAG s $6. price target is maintained with the six-month DCF rollover benefit offsetting 3-4% lower forecast earnings (due to reduced yields on technical reserves for longer). However, value has returned to IAG (after going ex-dividend and with the 12-month expected TSR now at 15%) and the Buy rating is reinstated (previously Hold). IAG on the whole has a better longer term track record than its large domestic peers in managing allowances (average costs above allowance per half $42m vs. US$14m for QBE and $98m for SUN), underwriting and insurance margins and ROE. Figure 16 IAG allowance track record 5 IAG hazard costs vs. allowance 4 Shaded area: El Nino (moderate to strong SOI, moderate to strong SST) 3 2 ($m) 1-1 Average natural hazard costs above allowance per half $42m Average major natural hazard event costs per half $23m Average other natural hazard event costs per half $14m -2 1H9 2H9 1H1 2H1 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 Total major natural hazard events Other natural hazard events <$15m Natural hazard costs vs. allowance Allowance for natural hazards SOURCE: COMPANY DATA Page 7

8 QBE Price target $1.65, Buy QBE s 1H16 headline results were: (1) GWP US$8,17m (BP US$8,478m); (2) cash NPAT US$287m, -39% pcp (BP US$343m); (3) cash EPS US$.21 per share, -39% pcp (BP US$.25); (4) interim dividend A$.21 per share, 5% franked (BP A$.22); (5) reported insurance margin 5.8% (BP 7.8%); (6) combined operating ratio (COR) 99.% (BP 95.4%); (7) PCA multiple 1.69x (BP 1.73x); and (8) ROE 5.6% (BP 6.5%). QBE s poor performance was largely due to higher outstanding claims from adverse movements in risk-free rates. While the impact was a US$283m loss in 1H16 (compared with a US$45m benefit in 1H15) with the weighted average risk-free rate down 7bp to.92%, this is regarded as a timing issue and the loss should unwind in due course. On an underlying basis (i.e. excluding the risk-free rate movement of 5% of NEP) COR improved slightly on a pcp basis to 94.% (low end of 216 guidance of 94-95%). This was aided by a higher than expected contribution from positive prior accident year (PAY) claims development of US$218m or 3.9% of NEP. At least in the near future, QBE expects reserve releases in the order of 1-2% of NEP. Excluding the UK reinsurance transaction and assuming the discount rate impact would be wound back in due course, a normalised COR of 94-95% in line with the insurer s long term targets should be achievable. The balance sheet and capital position remain strong. While QBE has lowered 216 GWP targets by ~3%, it has maintained guidance for NEP (US$ bn), COR (94-95%) and the insurance profit margin (8.5-1.%). QBE largely remains an interest rate play that unfortunately calls for further investment patience. With global risk-free rates likely to remain lower for longer, we have reduced QBE s cash earnings by 2-4% across the forecast horizon (float yield -3bp in the medium term) and the float valuation multiple (3% weighting) from.425 to.35 of total shareholders equity and float. This has resulted in a 5% lower price target of $1.65 although the Buy rating is maintained only due to valuation (i.e. 12-month TSR >15%). Figure 17 QBE allowance track record (no data for smaller events before 211) 1,6 QBE hazard costs vs. allowance 1,4 1,2 1, Shaded area: El Nino (moderate to strong SOI, moderate to strong SST) 8 ($m) Average natural hazard costs above allowance per half $14m Average major natural hazard event costs per half $458m Average other natural hazard event costs per half $347m 1H9 2H9 1H1 2H1 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 Total major natural hazard events Other natural hazard events > $2.5m Natural hazard costs vs. allowance Allowance for natural hazards SOURCE: COMPANY DATA Page 8

9 SUN Price target $14.25, Buy SUN s headline 216 results were as follows: (1) cash NPAT $1,89m (BP $1,86m, consensus $1,138m); (2) cash EPS 85cps (BP 85cps, consensus 88cps); (3) final ordinary dividend 38cps fully franked (BP 35cps, consensus 37cps); (4) no special dividend (BP 5cps, consensus 2cps); (5) ROE 8.2% (BP 8.%, consensus 8.4%); (6) GWP $9.bn (BP $9.bn, consensus $9.bn); (7) reported insurance margin 9.9% (BP 9.3%, consensus 1.3%); (8) COR 91% (BP 93%); and (9) PCA coverage 1.7x (BP 1.7x, target 1.5x) and CET1 coverage 1.2x (BP 1.3x, target 1.1x). While cash NPAT decreased by 9% pcp to $1,89m mainly from higher residual claims and lower investment yields in 1H16, performance across all businesses improved in 2H16. There were no surprises with SUN s performance relative to our forecasts except for the fact that there was no special dividend for the first time since 212. While initially disappointed, we believe this is a timing issue given some transitory requirements. Although not specified in its medium term targets, management reiterated there is no change to SUN s overall capital management strategy. As such, SUN remains committed to a dividend payout ratio in the 6-8% range (at the top end in the medium term) as well as returning capital in excess of requirements. The positive view of SUN continues to reflect its better outlook that is underpinned by operational improvements to date and conservative risk settings. In our recent sector note, we highlighted the resilience of general insurers such as SUN relative to the major banks in times of increasing regulatory constraints and distraction. This resilience reflects the insurers better capital and funding positions, higher loss buffers and reinsurance capacity, margin upside from repricing (as opposed to the banks current conundrum) and back office efficiencies to come that would result in overall earnings stability and predictability (despite occasional and inevitable CAT events put it this way, insurers have never needed to raise capital because of such events). SUN s $14.25 price target, Buy rating and forecasts are unchanged. Figure 18 SUN allowance track record 5 SUN hazard costs vs. allowance 4 Shaded area: El Nino (moderate to strong SOI, moderate to strong SST) 3 2 ($m) 1-1 Average natural hazard costs above allowance per half $98m Average major natural hazard event costs per half $224m Average other natural hazard event costs per half $121m -2 1H9 2H9 1H1 2H1 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 Total major natural hazard events Other natural hazard events > $5m Natural hazard costs vs. allowance Allowance for natural hazards SOURCE: COMPANY DATA Page 9

10 Cheat Sheet Page 1

11 Table 1 Cheat Sheet 1 IAG QBE QBE ANZ SUN Allianz Australia 1 P&L ($m) (US$m for QBE, EUR for Allianz) 216 1H16 1H Gross written premium (GWP) 11,367 8,17 1,861 9,31 2,991 Less: Gross unearned premium 44-1, Less: Outwards reinsurance expense -3,183-1, Net earned premium (NEP) 8,228 5,615 1,654 7,938 2,18 Net incurred claims -5,397-3,637-1,12-5,661-1,519 Acquisition expenses , Other underwriting expenses -1, Underwriting profit Inv. income - insurance funds Insurance profit 1, JV and other Inv. income - s'holders' funds Capital funding Contribution before tax & amortisation Reserve release Reserve release as % of NEP 2.5% 3.9% - 4.4% - Reinsurance expense as % of GWP 28% 16% 12% 11% - Loss ratio 66% 65% 68% 71% 7% - Australia Personal 68% % - - Australia Commercial 64% % - - New Zealand 64% % - Commission ratio 1% 18% 15% 14% 13% - Australia Personal 5% % - - Australia Commercial 15% % - - New Zealand 12% % - Underwriting ratio 16% 17% 13% 8% 13% - Australia Personal 14% - - 7% - - Australia Commercial 2% - - 9% - - New Zealand 16% - - 9% - Combined ratio 91% 99% 96% 93% 96% - Australia Personal 87% % - - Australia Commercial 98% % - - New Zealand 92% % - Insurance margin 14% 6% 9% 1% 14% - Australia Personal 2% - - 6% - - Australia Commercial 1% % - - New Zealand 9% % - Underlying insurance margin 14% 6% - 11% GWP % - Australia Personal 51% % - - Australia Commercial 26% % - - New Zealand 19% % - - Other 4% - - % - NEP % - Australia Personal 49% % - - Australia Commercial 28% % - - New Zealand 19% % - - Other 3% - - % - 2 Current year guidance GWP growth Relatively flat US$ bn US$3.7bn >System - NEP growth - US$ bn US$3.3bn - - Reserve release as % of NEP >=1.% % - 1.5% - Combined ratio % Insurance margin % (R) 8.5-1% (R) - =>12% (U) - ROE >=1.5x WACC - - =>1% - Dividend payout (as % of cash NPAT) 6-8% <=65% - 6-8% - CET1 target (x).9-1.1x x - PCA target (x) x x Net investment return - 2.7% Natural hazard allowance ($m) 68 ~9% NEP Capital Adequacy ($m) (US$m for QBE) CET1 2,838 6,72-2,827 - Total regulatory capital 4,619 9,378-3,89 - Prescribed Capital Amount (PCA) 2,682 5,549-2,328 - CET1 multiple (x) PCA multiple (x) Investment Income ($m) (US$m for QBE) Combined investment composition - Cash & Fixed Interest 84.4% 88.5% - 95.% - - Equities 8.3% 2.% - 3.3% - - Property & alternatives 7.2% 9.5% - 1.7% - Gross yield - policyholders' funds 5.3% 3.4% - 2.7% - Gross yield - shareholders' funds 2.3% 3.2% - 3.4% - SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Page 11

12 Table 2 Cheat Sheet 2 IAG QBE QBE ANZ SUN Allianz Australia 5 Pricing & other Shareprice $5.44 $ $ Price target $6. $ $ Target PB - 217e e Target PE - 217e e Target yield - 217e 4.3% 5.2% - 4.9% e 4.4% 5.7% - 5.2% - Expected return 15.% 16.3% - 2.5% - BP recommendation Buy Buy - Buy - S&P FSR and ICR (entities) AA- A+ - A+ - Market capitalisation ($bn) TSR 1 week 3% 1% - % - 1 month -2% -2% - -4% - 3 months -3% -16% - 4% - 1 year 15% -23% - 6% - BP estimates PB 215 (x) PB 216e (x) PB 217e (x) PB 218e (x) ROE % 8% - 9% - ROE 216e 13% 6% - 8% - ROE 217e 13% 9% - 9% - ROE 218e 14% 9% - 9% Insurance margin % 8% - 11% - Insurance margin 216e 14% 7% - 1% - Insurance margin 217e 14% 1% - 11% - Insurance margin 218e 14% 1% - 11% PE 215 (x) PE 216e (x) PE 217e (x) PE 218e (x) EPS 215 (cps) EPS 216e (cps) EPS 217e (cps) EPS 217e (cps) EPS growth % 3% - -9% - EPS growth 216e -15% -28% - -9% - EPS growth 217e % 43% - 16% - EPS growth 217e 6% 7% - 6% DPS 215 (cps) DPS 216e (cps) DPS 217e (cps) DPS 218e (cps) Yield % 5.2% - 7.1% - Yield 216e 6.5% 5.1% - 5.5% - Yield 217e 4.7% 5.8% - 5.6% - Yield 218e 4.9% 6.3% - 6.% Payout % 57% - 82% - Payout 216e 99% 76% - 8% - Payout 217e 71% 62% - 71% - Payout 218e 7% 63% - 71% 6 Value proposition SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Revenue and cost synergies through Berkshire Hathaway relationship Surplus capital and further synergies to sustain higher payout ratio Cash and growth story, with further capital release to come; spin-off Life Page 12

13 Global comps Table 3 Global comps Australian Insurance Listing Country Currency Last Price Market Cap Fiscal Year End EPS EPS Growth P/E P/B DPS Yield ROE FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2 QBE Insurance AU $AUD $9.58 $7,69 December % 3.8% % 5.9% 6.5% 8.4% Insurance Australia Group AU $AUD $5.44 $7,742 June % 4.3% % 5.1% 13.1% 13.1% Suncorp Group AU $AUD $12.41 $9,372 June % 3.7% % 6.4% 9.2% 9.4% Average -2.8% 13.% % 5.8% 9.6% 1.3% International Insurance Listing Country Currency Last Price Market Cap Fiscal Year End EPS EPS Growth P/E P/B DPS Yield ROE FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2 FY1 FY2 Admiral UK 2.8 5,865 December % % 6.% 48.9% 51.1% Allianz Germany ,966 December % 5.8% % 5.7% 1.1% 1.1% American Financial US $USD $75.49 $5,863 December % 4.2% % 2.% 1.2% 9.7% American International US $USD $58.9 $55,586 December % 37.% % 2.4% 5.2% 6.4% Berkshire Hathaway US $USD $219,44 $322,586 December % 9.8% % 7.4% Chubb US $USD $ $53,361 December % 8.3% % 2.3% 9.9% 9.7% Cincinnati US $USD $75.57 $11,115 December % -.6% % 8.2% Direct Line UK $USD $3.84 $5,281 December % -2.6% % 6.4% 16.7% 15.8% Hartford US $USD $42.5 $12,586 December % 25.3% % 2.3% 7.7% 8.3% Intact Canada $CAD $94.49 $7,262 December % 26.5% % 2.6% 13.2% 15.5% Progressive Corp US $USD $31.19 $13,926 December % 26.4% % 1.8% 12.7% 14.4% RSA UK ,581 December % 4.5% % 3.6% 8.5% 11.3% Travelers US $USD $ $25,643 December % 3.4% % 2.4% 11.5% 11.4% WR Berkley US $USD $57.92 $5,455 December %.5% %.9% 9.7% 9.% XL Group US $USD $34.31 $7,239 December % 79.4% % 2.6% 4.5% 7.2% Average 3.2% 18.% % 3.2% 12.3% 13.% SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Page 13

14 Financials Page 14

15 Table 4 IAG Insurance Australia Group Share Price (A$) 5.44 As at 22-Sep-16 Market Cap (A$M) 13,227 PROFIT AND LOSS VALUATION DATA Y/e June 3 ($m) e 218e 219e Y/e June 3 ($m) e 218e 219e General Insurance NPAT (cash basis) Gross written premium (GWP) 11,44 11,367 11,453 11,619 11,869 EPS (statutory basis) (cps) Less: Gross unearned premium Growth -44% -17% 3% 6% 4% Less: Reinsurance expense -1,196-3,183-3,52-3,97-3,164 EPS (cash basis) (cps) Net earned premium (NEP) 1,329 8,228 8,395 8,512 8,692 - Growth -29% -15% % 6% 3% Gross claims expense -7,18-5,64-5,652-5,734-5,856 P / E ratio (times) Reserve release P / Book ratio (times) Net claims expense -6,941-5,397-5,385-5,56-5,669 P / NTA ratio (times) Commission expense -1, Net DPS (cps) Underwriting expense -1,813-1,37-1,316-1,286-1,311 Yield 5.2% 6.5% 4.7% 4.9% 5.1% Underwriting profit Franking 1% 1% 1% 1% 1% Investment income on tech. reserves Payout (cash) (target 5-7%) 67% 99% 71% 7% 71% Insurance profit 1,13 1,178 1,15 1,192 1,187 Effective tax rate 11% 22% 27% 28% 28% Other Associates CAPITAL ADEQUACY Total divisional result 1,129 1,187 1,189 1,246 1,254 Y/e June 3 ($m) e 218e 219e Net corporate expense CET1 capital 3,212 2,838 2,74 2,974 3,213 Interest Total Tier 1 capital 3,974 3,545 3,447 3,681 3,92 Investment income - s'holders' funds Total capital base 4,785 4,619 4,741 4,975 4,837 Other CET1 multiple (x) (target.9-1.1x) Profit before tax and amortisation 1, ,281 1,353 1,395 PCA multiple (x) (target x) Income tax expense Not'l surplus capital (CET1 based >1.1x) Discontinued operations (after tax) - Per share (cps) Minority interest Not'l surplus capital (PCA based >1.6x) Profit after tax b4 amortisation Per share (cps) Amortisation and impairment Profit/(loss) attrib. to shareholders PROFITABILITY RATIOS Y/e June e 218e 219e CASHFLOW Return on assets 3.3% 2.8% 2.8% 2.8% 2.9% Y/e June 3 ($m) e 218e 219e Return on equity 14.9% 12.7% 13.4% 13.7% 13.7% Profit/(loss) attrib. to shareholders Growth in GWP 17.% -.6%.8% 1.5% 2.1% Growth in NEP 19.5% -2.3% 2.% 1.4% 2.1% Increase in investments , Loss ratio 67.2% 65.6% 64.1% 64.7% 65.2% Increase in premium receivable Expense ratio 27.6% 25.7% 25.% 24.1% 23.9% Increase in other assets -1,783-1, Commission ratio 1.% 9.8% 9.3% 9.% 8.9% Investing cashflow -1,865 1,178-1, Administration ratio 17.6% 15.9% 15.7% 15.1% 15.1% Combined ratio 94.8% 91.3% 89.1% 88.8% 89.2% Increase in unearned premium Insurance margin 1.7% 14.3% 13.7% 14.% 13.7% Increase in interest bearing liabilities Equity raised RESERVES Other 575-2,15 1, Y/e June 3 ($m) e 218e 219e Financing cashflow 996-1, Net Central Estimate 7,432 6,438 6,564 6,663 6,85 Risk Margin 1,675 1,451 1,479 1,51 1,533 Net change in cash Net outstanding claims liability (claims reserve) 9,17 7,889 8,44 8,165 8,339 Cash at end of period Unearned premium 6,156 6,22 6,253 6,349 6,484 Less: DAC -1,42-1,372-1,384-1,353-1,38 BALANCE SHEET Less: Insurance receivables -3,251-3,334-3,352-3,43-3,476 Y/e June 3 ($m) e 218e 219e Technical reserves 1,61 9,43 9,562 9,757 9,968 Cash and cash equivalents Investments 16,96 13,432 14,37 14,76 14,793 DIVISIONAL Premium receivable 3,251 3,334 3,352 3,43 3,476 Y/e June 3 ($m) e 218e 219e Trade and other receivables Gross written premium (GWP) Reinsurance and other recoveries 3,713 4,689 5,348 5,429 5,545 Consumer (FY14+) 5,614 5,81 5,917 6,65 6,217 DAC and DRE 2,838 2,778 2,81 2,74 2,793 Business (FY14+) 3,192 2,979 2,83 2,82 2,83 Intangible assets and goodwill 3,561 3,41 3,41 3,41 3,41 New Zealand 2,267 2,182 2,289 2,313 2,359 Other assets 984 1,137 1,137 1,137 1,137 United Kingdom Total assets 31,42 3,3 31,66 32,129 32,44 Asia Other Outstanding claims 12,687 11,741 13,392 13,594 13,883 Gross written premium (GWP) Unearned premium 6,156 6,22 6,253 6,349 6,484 Consumer (FY14+) 49% 51% 52% 52% 52% Interest bearing liabilities 1,762 1,962 1,962 1,962 1,585 Business (FY14+) 28% 26% 25% 24% 24% Other liabilities 3,779 3,322 3,322 3,322 3,322 New Zealand 2% 19% 2% 2% 2% Total liabilities 24,384 23,245 24,929 25,226 25,275 United Kingdom % % % % % Asia 3% 3% 3% 3% 4% Ordinary share capital 7,275 7,275 6,975 6,975 6,975 Other % % % % % Treasury shares held in trust Insurance profit Reserves Consumer (FY14+) Retained profits Business (FY14+) Minority interests New Zealand Total shareholders' equity 7,18 6,785 6,676 6,92 7,129 United Kingdom Asia Total sh. equity & liabs. 31,42 3,3 31,66 32,129 32,44 Other Insurance profit WANOS - statutory (m) 2,332 2,423 2,4 2,37 2,37 Consumer (FY14+) 71% 68% 57% 56% 55% WANOS - cash (m) 2,332 2,423 2,4 2,37 2,37 Business (FY14+) 8% 2% 14% 15% 15% New Zealand 2% 11% 27% 27% 28% Reserve release as % of NEP 1.6% 2.5% 3.2% 2.7% 2.2% United Kingdom % % % % % Reinsurance expense as % of GWP 1.5% 28.% 26.6% 26.7% 26.7% Asia 1% 2% 3% 3% 3% Effective tax rate 11% 22% 27% 28% 28% Other -1% -1% -2% -2% -2% SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Page 15

16 Table 5 QBE QBE Insurance Group Share Price (A$) 9.58 As at 22-Sep-16 Market Cap (A$M) 13,137 PROFIT AND LOSS VALUATION DATA Y/e December 31 (US$m from 29) e 217e 218e Y/e December 31 (US$m from 29) e 217e 218e General Insurance NPAT (cash) Gross written premium (GWP) 16,332 15,92 14,38 14,188 14,428 EPS (statutory basis) (US cps) Less: Gross unearned premium Growth -374% -12% -13% 46% 8% Less: Reinsurance expense -2,437-2,68-2,288-2,255-2,259 EPS (cash basis) (US cps) Net earned premium (NEP) 14,84 12,314 11,545 11,724 11,953 - Growth 1% 3% -28% 43% 7% Gross claims expense -9,84-7,569-7,635-7,26-7,41 P / E ratio (times) Reserve release P / Book ratio (times) Net claims expense -8,9-7,434-7,36-7,9-7,231 P / NTA ratio (times) Commission expense -2,363-2,114-2,39-2,23-2,54 Net DPS (A cps) Underwriting expense -2,274-2,137-1,923-1,916-1,946 Yield 3.8% 5.2% 5.1% 5.8% 6.3% Underwriting profit Franking 1% 1% 5% 5% 5% Investment income on tech. reserves Payout (up to 65% of cash NPAT) 52% 57% 76% 62% 63% Insurance profit 1,74 1, ,163 1,27 Effective tax rate 2% 27% 23% 23% 23% Other Associates 1 CAPITAL ADEQUACY Total divisional result 1,75 1, ,163 1,27 Y/e December 31 (US$m from 29) e 217e 218e Amortisation and impairment Tier 1 capital 7,56 7,65 7,68 7,488 7,918 Interest Tier 2 capital 2,198 2,619 2,472 2,472 2,472 Investment income - s'holders' funds Total capital base 9,74 9,684 9,54 9,96 1,39 Other Total PCA 5,815 5,614 5,264 5,453 5,79 Profit before income tax ,147 1,241 PCA multiple (x) (target x) Income tax expense CET1 / PCA (>6%) 125% 122% 131% 134% 135% Discontinued operations (after tax) Notional surplus capital (> 1.8x PCA) Minority interest Per share (US cps) Profit after income tax Amortisation and impairment PROFITABILITY RATIOS Cash profit after income tax Y/e June e 217e 218e Return on assets 1.7% 2.% 1.5% 2.1% 2.2% CASHFLOW Return on equity 7.5% 8.2% 6.2% 8.6% 8.9% Y/e December 31 (US$m from 29) e 217e 218e Growth in GWP -9.1% -7.6% -7.% 1.1% 1.7% Cash profit after income tax Growth in NEP -8.5% -12.6% -6.2% 1.6% 2.% Loss ratio 63.2% 6.4% 63.3% 6.5% 6.5% Increase in investments 1,665 1,671 1, Expense ratio 32.9% 34.5% 34.3% 33.6% 33.5% Increase in premium receivable 2, Commission ratio 16.8% 17.2% 17.7% 17.3% 17.2% Increase in other assets -2, , Underwriting ratio 16.1% 17.4% 16.7% 16.3% 16.3% Investing cashflow 1,236 2, , Combined ratio 96.1% 94.9% 97.6% 94.1% 94.% Insurance margin 7.6% 8.4% 6.7% 9.9% 1.1% Increase in unearned premium , Increase in interest bearing liabilities -1, RESERVES Equity raised Y/e December 31 (US$m from 29) e 217e 218e Other , Net Central Estimate 15,595 14,119 14,849 15,317 15,612 Financing cashflow -2,443-3, Risk Margin 1,353 1,26 1,3 1,341 1,367 Net outstanding claims liability 16,948 15,379 16,149 16,658 16,979 Net change in cash Unearned premium 7,366 7,6 5,97 5,974 6,76 Cash at end of period Less: DAC -2,31-2,538-3,89-3,133-3,181 Less: Insurance receivables -2,299-2,289-2,121-2,145-2,182 BALANCE SHEET Technical reserves 19,984 17,558 16,845 17,354 17,692 Y/e December 31 (US$m from 29) e 217e 218e Cash and cash equivalents DIVISIONAL Investments 27,736 26,65 24,481 25,461 25,68 Y/e December 31 (US$m from 29) e 217e 218e Premium receivable 2,299 2,289 2,121 2,145 2,182 Gross written premium (GWP) Trade and other receivables 2,449 2,661 3,416 3,416 3,416 North American Operations 5,31 4,961 4,497 4,542 4,632 Reinsurance and other recoveries 3,464 3,24 3,79 3,826 3,9 Latin American Operations 1,394 DAC and DRE 2,31 2,538 3,89 3,133 3,181 European Operations 4,526 4,386 4,137 4,137 4,178 Intangible assets and goodwill 3,831 3,64 3,567 3,517 3,467 Australian & NZ Operations 4,392 3,787 3,655 3,729 3,83 Other assets 2,338 1,153 1,175 1,175 1,175 Emerging Markets (AsiaPac to 214) 785 1,97 1,69 1,641 1,674 Total assets 45, 42,176 42,322 43,437 43,764 Loss ratio Outstanding claims 2,412 18,583 19,858 2,484 2,879 North American Operations 68% 63% 68% 64% 64% Unearned premium 7,366 7,6 5,97 5,974 6,76 Latin American Operations 84% Interest bearing liabilities 3,584 3,529 3,482 3,482 2,883 European Operations 53% 53% 59% 57% 57% Other liabilities 2,556 2,498 2,53 2,53 2,53 Australian & NZ Operations 58% 63% 66% 63% 63% Total liabilities 33,918 31,616 31,777 32,47 32,368 Emerging Markets (AsiaPac to 214) 52% 61% 55% 55% 55% Equator Re & Other 74% 81% 59% 59% 59% Ordinary share capital 9,391 8,44 8,664 8,732 8,81 Treasury shares held in trust Combined ratio Reserves & other -1,45-1,248-1,553-1,553-1,553 North American Operations 11% 99% 1% 95% 95% Retained profits 3,44 3,313 3,377 3,729 4,81 Latin American Operations 123% Minority interests European Operations 91% 89% 98% 95% 96% Total shareholders' equity 11,82 1,56 1,546 1,966 11,396 Australian & NZ Operations 87% 91% 95% 91% 91% Emerging Markets (AsiaPac to 214) 94% 13% 1% 99% 99% Total sh. equity & liabs. 45, 42,176 42,322 43,437 43,764 Equator Re & Other 8% 89% 7% 7% 7% WANOS - statutory (m) 1,292 1,367 1,37 1,375 1,382 Insurance margin WANOS - cash (m) 1,292 1,367 1,37 1,375 1,382 North American Operations % 3% 1% 6% 6% Latin American Operations -13% Reserve release as % of NEP 1.3% 1.1% 2.8% 1.4% 1.4% European Operations 13% 14% 4% 7% 7% Reinsurance as % of GWP 14.9% 17.3% 16.3% 15.9% 15.7% Australian & NZ Operations 18% 14% 11% 14% 14% Debt to equity (target 25-35%) 32% 33% 33% 32% 25% Emerging Markets (AsiaPac to 214) 6% 4% 7% 7% 7% Gross unearned premium as % of GWP -1.2% 1.1% 1.5% 1.5% 1.5% Equator Re & Other 28% 28% 38% 37% 37% $.75 Yield - policyholders' funds 2.6% 2.2% 2.9% 2.7% 2.7% ROTE 12.6% 12.5% 9.4% 12.8% 13.% Net investment contribution 3.7% 3.3% 4.3% 4.% 4.1% EPS (cash basis) (A cps) SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Page 16

17 Table 6 SUN Suncorp Group Share Price (A$) As at 22-Sep-16 Market Cap (A$M) 15,967 PROFIT AND LOSS VALUATION DATA Y/e June 3 ($m) e 218e 219e Y/e June e 218e 219e Banking NPAT (cash basis) ($m) 1,192 1,89 1,26 1,333 1,393 Net interest income 1,13 1,129 1,142 1,28 1,279 EPS (statutory basis) (cps) Other income Growth 55% -8% 15% 9% 5% Total banking income 1,21 1,217 1,223 1,295 1,371 EPS (cash basis) (cps) Operating expenses Growth -9% -9% 16% 6% 4% Impairment expenses P / E ratio (times) One-off items P / Book ratio (times) Contribution before tax P / NTA ratio (times) Net DPS (cps) General Insurance Yield 7.1% 5.5% 5.6% 6.% 6.3% Gross written premium (GWP) 8,872 9,31 9,177 9,325 9,47 Franking 1% 1% 1% 1% 1% Less: Gross unearned premium Payout (cash) (ord., target 6-8%) 82% 8% 71% 71% 72% Less: Outwards reinsurance expense -1, Effective tax rate 3% 31% 3% 3% 3% Net earned premium (NEP) 7,865 7,938 8,295 8,429 8,561 Claims expense -7,581-7,121-7,39-7,452-7,594 CAPITAL ADEQUACY Reinsurance and other recoveries 1,994 1,46 1,29 1,31 1,33 Y/e June e 218e 219e Net incurred claims -5,587-5,661-6,19-6,141-6,264 Risk weighted assets ($m) 3,61 31,459 33,497 35,654 37,938 Acquisition expenses -1,127-1,146-1,7-1,59-1,5 Average risk weight 59% 58% 58% 58% 58% Other underwriting expenses Tier 1 ratio 1.6% 1.6% 11.2% 11.7% 12.2% Underwriting result Core Tier 1 ratio (Bank) 9.2% 9.2% 9.8% 1.4% 11.% Investment income - insurance funds Total capital ratio (Bank) 13.8% 13.5% 13.9% 14.3% 14.6% Insurance trading result (ITR) Equity ratio 14.1% 14.2% 13.9% 13.8% 13.6% Managed schemes net contribution General insurance PCA (x) JV and other income 6 2 Investment income - s'holders' funds PROFITABILITY RATIOS Capital funding Y/e June e 218e 219e Contribution before tax 1, ,38 1,73 Return on assets 1.3% 1.1% 1.3% 1.3% 1.3% Return on equity 8.9% 8.1% 9.1% 9.4% 9.6% Life contribution before tax Leverage (times) Other Net interest margin 1.84% 1.85% 1.84% 1.84% 1.84% - LJ Hooker Cost / income ratio 53% 53% 51% 49% 48% - Consolidation & other adjustments Cost / average assets 1.8% 1.5% 1.1%.97%.94% Profit before tax & PMN items 1,78 1,564 1,8 1,95 1,991 Growth in contribution before tax -8% -6% 6% 6% 5% Intangible adjustments ITR margin 11.4% 9.9% 1.7% 11.% 11.1% DAC adjustment Combined ratio 94% 93% 92% 92% 92% Integration costs Loss ratio 71% 71% 73% 73% 73% Income tax GWP growth.% 1.8% 1.6% 1.6% 1.6% Minority interests NPAT (statutory basis) 1,134 1,38 1,195 1,299 1,36 ASSET QUALITY Non cash adjustments/non-core items Y/e June e 218e 219e NPAT (cash basis) 1,192 1,89 1,26 1,333 1,393 Impairment expense / GLA.11%.3%.5%.7%.11% Impairment expense / RWA.19%.5%.8%.12%.19% CASHFLOW Total provisions ($m) Y/e June 3 ($m) e 218e 219e Total provisions / RWA 1.16%.79%.78%.76%.75% NPAT (cash basis) 1,192 1,89 1,26 1,333 1,393 Indiv ass prov / gross imp assets 38% 27% 27% 27% 27% Total provisions + GRCL / RWA 1.16%.79%.78%.76%.75% Increase in loans -1,929-2,46-3,55-3,711-3,928 Increase in other assets 1,78 2, DIVISIONAL Capital expenditure Y/e June 3 ($m) e 218e 219e Investing cashflow ,316-3,657-4,173 Core Banking Net interest income 1,13 1,129 1,142 1,28 1,279 Increase in interest bearing liabilities 2,16 2,366 9,484 2,817 3,437 Other income Increase in insurance liabilities 83-2,369-5, Total banking income 1,21 1,217 1,223 1,295 1,371 Equity raised 2-5 Operating expenses Other -2,278-1, Impairment expenses Financing cashflow -33-1,87 3,56 2,324 2,78 Contribution before tax Net change in cash Home loans 41,785 44,252 46,78 49,446 52,257 Cash at end of period 1,216 1,798 1,798 1,798 1,798 Other loans 1,133 1,28 11,16 12,72 13,22 Interest bearing liabilities 56,7 58,567 62,81 65,86 69,754 BALANCE SHEET Risk weighted assets (RWA) 3,61 31,459 33,497 35,654 37,938 Y/e June 3 ($m) e 218e 219e - Average risk weight 59% 58% 58% 58% 58% Cash and liquid assets 1,216 1,798 1,798 1,798 1,798 Collective provisions Divisional gross loans 51,918 54,28 57,796 61,518 65,458 - As % of RWA.41%.34%.34%.34%.34% Provisions Gross impaired assets Core Bank interest earning assets 8,875 7,949 7,949 7,949 7,949 - As % of gross loans.4%.4%.4%.4%.4% Non-core Bank interest earning assets GRCL Intangibles 5,783 5,878 5,786 5,737 5,69 Individually assessed provisions PP&E As % of gross impaired assets 38% 27% 27% 27% 27% Insurance assets 6,856 6,419 7,224 7,165 7,43 Other assets 21,2 19,45 19,45 19,45 19,45 Non-core Banking Total assets 95,651 95,748 99,972 13,58 17,76 Net interest income Other income Interest bearing liabilities 59,533 61,899 71,383 74,2 77,637 Total banking income Insurance liabilities 2,63 18,261 12,693 13,112 13,418 Operating expenses Other liabilities 1,97 2,18 2,18 2,18 2,18 Impairment expenses Total liabilities 82,133 82,178 86,94 89,33 93,73 Contribution before tax Ordinary share capital 12,684 12,679 12,679 12,679 12,679 Loans Other equity instruments Other interest earning assets Reserves Interest bearing liabilities Retained profits ,364 1,747 Risk weighted assets (RWA) Minority interests Average risk weight % % % % % Total shareholders' equity 13,518 13,57 13,877 14,25 14,633 Collective provisions - As % of RWA.%.%.%.%.% Total sh. equity & liabs. 95,651 95,748 99,972 13,58 17,76 Gross impaired assets - As % of gross loans.%.%.%.%.% WANOS - statutory (m) 1,279 1,279 1,279 1,279 1,279 GRCL WANOS - cash (m) 1,279 1,279 1,279 1,279 1,279 Individually assessed provisions - As % of gross impaired assets % % % % % SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Page 17