Why is the Suncorp share price cratering today?

A broker has downgraded the insurance and banking group.

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Key points

  • The Suncorp share price is currently the worst performer on the ASX 200 today after it got downgraded by a broker
  • Morgan Stanley warned that Suncorp is one of the companies most exposed to the structural risks stemming from climate change
  • The broker slashed its valuation on the shares and suggested Suncorp will have to slump another 9% before it reaches fair value

The Suncorp Group Ltd (ASX: SUN) share price is tanking today after a top broker downgraded it due to “structural” risks from climate change.

Shares in the insurance and banking group have so far tumbled 5.12% to a three-week low of $11.50.

This makes the share the worst performer on the S&P/ASX 200 Index (ASX: XJO) at the time of writing.

For comparison, the Insurance Australia Group Ltd (ASX: IAG) share price and QBE Insurance Group Ltd (ASX: QBE) share price are also falling, by around 3% and 2% respectively.

What’s up with the Suncorp share price?

No catastrophe (CAT) insurer can escape the impact of climate change. But the Suncorp share price could also be taking a beating after Morgan Stanley cut its price target with an “underweight” rating, according to the Australian Financial Review.

The broker reckons that Suncorp and IAG are more exposed to catastrophic weather events than QBE. QBE is a more diversified business.

Morgan Stanley said:

Investors have been discounting climate change and CAT risks as cyclical for insurers, but we think they are structural as our new analysis shows.

Consensus ratings are heavily OW [overweight] on both SUN and IAG, leaning on both stocks being cheap because they have de-rated in the past three years, and also ascribing the ongoing over-runs on CAT costs as cyclical one-offs or sheer bad luck.

We would say that just because SUN and IAG have de-rated recently, does not mean that SUN and IAG are cheap enough.

When cheap isn’t cheap enough

The Suncorp share price has de-rated by around two times price-to-earnings (P/E) points to circa 14 times consensus P/E. The IAG share price shed around 3 times P/E points to 15 times consensus.

But despite the big sell-off today, there is further downside risk to the Suncorp share price, according to Morgan Stanley.

The broker lowered its 12-month price target on Suncorp to $10.50 from $12.50 a share. This implies that the Suncorp share price has to fall another 9% before reaching fair value.

The Suncorp share price vs. the IAG share price

The IAG share price was also downgraded by the broker. Morgan Stanley trimmed its 12-month price target to $3.70 from $4.05 a share.

The reason why IAG is fairing a little better is probably because the broker kept its “equal-weight” recommendation on the shares.

With the big loss in the Suncorp share price today, it is now down 0.2% since the start of 2022. At least that’s a bit better than the IAG share price, which has shed almost 2% of its value since the start of January.

In comparison, the ASX 200 is nursing a loss of 4.6% for the calendar year.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Insurance Australia Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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