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Frontier, Hertz, IAG, Mallinckrodt and Suncorp.

by FIIG Research | Aug 11, 2019

IAG FY19 Results: Earnings from continuing operations impacted by increase in natural peril claims

Insurance Australia Group (IAG) reported a statutory net profit after tax (NPAT) of AUD1.08bn for the financial year ended June 30 2019, up 17% year-on-year. However, excluding the sale of its Thailand business, profit from continuing operations was down 8.0% to AUD871m, driven primarily by an increase in natural peril claims.

The underlying performance for IAG was sound. Gross written premiums (GWP) were up 3.1% to AUD12.0bn in FY19, although they were largely underpinned by increased margins, with volumes either flat or modestly down in both Australia and New Zealand. IAG’s underlying insurance margin, as measured by underlying insurance profit (insurance profit adjusted for items  including net natural peril claims) to net earned premiums, benefited from increased margins, as well as the benefits from previously entered into quota shares (basically a sharing of premiums and claims expense between IAG and its reinsurers) and improved to 16.6%, from 14.1% in FY18. IAG’s reported margin was lower (but within guidance), reflecting higher claims expense and a lower prior period reserve release (actual claims  expenses were higher than assumed in prior reserving).

The higher claims expense stemmed from a number of significant natural peril events, including the NSW/Queensland hailstorm events in December 2018 and North Queensland flooding in early 2019, resulting in a higher loss ratio of 63.8% (from 60.2%). IAG’s expense ratio (a measure of IAG’s operating efficiency) improved to 23.7% (from 24.5%). However, despite the improved efficiency, its reported combined ratio (a combination of the loss ratio and expense ratio, which is a measure of underwriting profitability) increased from 84.7% to 87.5% (a ratio below 100 percent indicates that the company is making underwriting profit).

IAG’s capital adequacy remains strong, with a Common Equity Tier One regulatory solvency ratio of 1.12x after allowance for the full-year dividend, against IAG’s target benchmark of 0.9x – 1.1x. This is compares with a minimum regulatory requirement of 0.6x.

Suncorp FY19 Results: Headline NPAT impacted by sale of life insurance operations

Suncorp reported a statutory net profit after tax of AUD175m for the financial year ended June 30 2019, down 84% year-on-year. However, the decline was almost entirely a result of the loss on the sale of Suncorp’s life insurance operations. Profit after tax from continuing operations was 1.0% higher at AUD1.2bn.

Suncorp’s Australian insurance trading profit was soft, down more than 17% to AUD732m. Growth in gross written premiums (GWP) was modest at 1.3% and largely driven by margin improvements, with volumes lower. The trading profit was noticeably impacted by higher natural hazard claims of AUD835m, AUD155m above allowances (stemming from adverse weather events in NSW and Queensland in late-2018, early-2019). The loss ratio increased to 74.7% (from 70.3%), with the combined ratio (a measure of underwriting profitability) increasing by 5pp to 96.0% (a ratio below 100 percent indicates that the company is making underwriting profit). New Zealand was markedly stronger, aided by strong margin growth and a favourable claims expense. Trading profit was up more than 100% to NZD284m, supported by strong growth in GWP’s (8.4% higher to NZD1.7bn) and lower net incurred claims (down 5.7% to NZD697m). The loss ratio fell to just below 50.0%, while the combined ratio declined by nearly 9pp to 81.3%.  

Suncorp’s banking operations, which account for around a third of profit from continuing operations, reported a decent outcome given the competitive landscape. NPAT was down 1.4% to AUD364m on the back of softer margins and subdued lending growth. Credit losses remain negligible at 2bps, although non-performing loans (impaired and 90-days past due) edged higher to 103bps as a result of lower property valuations and the impact of flooding in Queensland, the latter of which should reverse in the near term. Collective provisions were higher by AUD20m, although this largely reflected a change in accounting standards.

Suncorp’s capital adequacy remains strong across the group. The general insurance Common Equity Tier One (CET1) regulatory solvency ratio (pre-dividend) was 1.35x, while the banking operations CET1 was 9.28%, both above internal targets.   

Mallinckrodt Announces 2Q19 Results

On 6 August 2019, Mallinckrodt Pharmaceuticals (Mallinckrodt, Company) announced 2Q19 results for the three months ended 30 June 2019. Results continue to be robust with the Company recording quarterly growth in revenues, EBITDA and cash flow generated from operations. Mallinckrodt recorded revenue growth of 4.1% to USD823.3m, EBITDA growth of 12% to USD343.3m and generated USD302.9m in cash from its operations. Acthar, the Company’s flagship drug, still accounted for almost a third of total revenues. Revenue from Acthar is forecasted to decline as questions around its efficacy and reimbursement difficulties from Medicare persist. Revenues from the Company’s other specialty brands, such as Inomax and Ofirmev, have continued their increased contribution to Mallinckrodt’s revenue.

While results were robust, Mallinckrodt has significant headwinds to navigate. The Company, along with other industry peers, is facing litigation pertaining to opioid addiction from various states. It is difficult to quantify any potential fines which could be a drag on the Company’s cash flow and earnings. Consequently, the Company has decided to halt proceedings on divestment of its Generics business. Additionally, the Company is continuing discussions with Centres for Medicare and Medicaid Services in relation to Acthar’s base price, which could result in some back payment.

Hertz Announces 2Q19 Results

On 6 August 2019, Hertz Global Holdings, Inc. (Hertz, Company) announced 2Q19 results for the three months ended 30 June 2019. Hertz continued its recent strong run of results, with significant improvement compared to 2Q18. Revenue grew to USD2.3bn (USD 2.2bn 2Q18); EBITDA grew to USD 284m (USD153m 2Q18) and the Company returned to profitability overturning a loss a year ago, reporting net income of USD38m for the quarter. Additionally, Hertz also generated USD540m of cash from its operations.

Hertz’s disciplined approach to fleet management and top-line growth has culminated in stronger operating metrics. Favourable volumes and pricing, in conjunction with better fleet utilisation has led to stronger EBITDA margins for the Company. The Company’s improving metrics flowed in the equity capital markets, as Hertz successfully raised USD750m via a rights issue. Hertz has indicated that proceeds will be used to delever its balance sheet and repay debt.

Frontier Announces 2Q19 Results

On 7 August 2019, Frontier Communications (Frontier, Company) announced 2Q19 results for the three months ended 30 June 2019. Frontier reported a net loss of USD5.31bn for the quarter. Although alarming, the result was largely influenced by a non-cash goodwill impairment charge of USD5.45bn. Revenue and EBITDA remained constant, as the Company generated USD2.0bn in revenue and recorded EBITDA of USD848m. Importantly, Frontier continued its debt reduction focus repaying USD213m in debt during the quarter.

Frontier still faces significant operational headwinds moving forward. Although the Company has reiterated its commitment to reducing leverage, it still has significant way to go given the current debt in excess of USD16bn. During 2Q19, Frontier recorded net interest expense of USD382m. Furthermore, the Company is faced with continued revenue declines, higher labour costs and increasing customer churn. The sale of its operations in Washington, Oregon, Idaho, and Montana for USD1.35bn should provide Frontier cash to reduce leverage in the short-term.