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Date : 11/08/2022

Suncorp Group

ASX :

SUN

Market Cap : $14.06 Billion

Dividend Per Share : $0.4

Dividend Yield : 3.45 %

Buy

52 Week Range : $10.020 - $12.970

Share Price : $11.59

Insurance business is positioned well. The demerger going through can boost dividends. We recommend a 'Buy'

Company Analysis

Suncorp Group (ASX: SUN) reported FY22 earnings, and their top line numbers came in strong as the Group benefitted from premium growth in the year’s second half, and home lending growth also chipped in. However, these results were impacted by volatile investment markets and elevated natural hazard costs – bringing down bottom line profits and dividends. These factors have reduced pre-tax profits by over $700 million compared to FY21.

Suncorp also added that the sale of Suncorp Bank to Australia and New Zealand Banking Group for cash consideration of $4.9 billion is expected to complete in the second half of the calendar year 2023.

A strong turnaround in home lending achieved growth of $4.1 billion, driven by higher new business volumes, improved customer experiences and faster turnaround times. Suncorp continues to maintain a high-quality and conservatively positioned home lending portfolio.

Net profit after tax was down by 34.1% to $681 million, while cash earnings were down 36.7% to $673 million.

Weather Weighed on the Insurance Business

The Insurance segment in Australia saw growth across the portfolio; however, weather and volatile markets weighted on the performance.

Gross Written Premiums (GWP) grew 6.8%, reflecting positive unit performance and rate increases driven by the ongoing pricing response to higher input costs. The increased focus on improved risk selection and portfolio discipline resulted in some portfolio exits.

The Home portfolio grew 9.6%, with Average Written Premium (AWP) increases reflecting the ongoing pricing response to higher natural hazard and reinsurance costs.

Motor increased by 8.7%, benefitting from ongoing strategic investment in AAMI marketing and enhanced digitisation of the sales process, driving positive unit performance. AWP increases reflected underlying inflation and higher sums insured.

In Commercial, the portfolio grew 7.5% with strong performances in the NTI and Property businesses and good rate growth, retention, and new business across most portfolios.

However, the prevailing La Niña weather pattern across Australia and New Zealand led to 35 separate weather events and around 130,000 natural hazard claims. This resulted in the Group exceeding its natural hazard allowance by $101 million, with significant recoveries made under the Group’s reinsurance program. Total natural hazard costs were $981 million, up from $932 million in the pcp. This was $57 million above Insurance Australia’s $924 million allowance.

Volatile investment markets, including rapidly rising yields and widening credit spreads, drove mark-to-market losses across the Group’s $14.9 billion investment portfolios. The net loss from investment market volatility was $190 million compared to a profit of $453 million in the prior year. Given that the Group holds its fixed interest investments to maturity, Suncorp added that most of these FY22 accounting losses are expected to unwind to profit over coming periods.

Dividend Payout

The Board has declared a fully franked final ordinary dividend of $0.17 per share, bringing the total fully franked ordinary dividends for FY22 to $0.40 per share. The Group’s full-year dividend payout of 75% of cash earnings is towards the top of the target payout range of 60% to 80%.

The Group’s underlying Insurance Trading Ratio (excluding COVID-19 impact) came in at 9%, up from 7.2% in FY21 (2H22: 9.9%), largely reflecting a strong contribution from the Consumer portfolio.

While Suncorp did not provide guidance, they did mention that the dividend payout policy will remain unchanged, that is, between 60%-80%.

Future Looks Positive

Suncorp said their extensive modelling of catastrophe risk indicates only a minor upward trend in the frequency of natural hazard-related events; more recent years have been adversely affected by the prevalence of the La Niña related weather pattern.

The Group has noted current modelling pointing to the likelihood of a third consecutive La Niña year. However, Suncorp has fully placed its reinsurance program, increased allowances, and set the balance sheet appropriately.

Thus, Suncorp has increased its natural hazard allowance for FY23 to $1,160 million, reflecting net exposure growth in the underlying portfolio, recent natural hazard experience and changes to the reinsurance program in FY23.

This measure should mitigate any severe impacts from adverse weather and safeguard Suncorp’s profitability – supporting an increase in dividends next year.

Outlook

The FY23 plan aims to deliver a growing business with a sustainable return on equity above the through-the-cycle cost of equity.

  • In General Insurance, GWP growth is expected to be primarily driven by increases in Average Written Premium (AWP) as the business responds to increased input costs, including reinsurance, natural hazards, and supply chain inflation.
  • Underlying Insurance Trading Ratio (ITR): The Group’s underlying ITR is impacted by headwinds from factors such as higher reinsurance and natural hazard costs which are expected to be offset by higher pricing and the benefits from rising yields and strategic initiatives. The 10% to 12% target in FY23 is reaffirmed.
  • Cost to Income: The cost-to-income ratio target of ~50% by the end of FY23 is reaffirmed as the benefits of increased growth and the strategic work program are expected to be realised, and the associated spending decreases. Favourable trends in the interest rate cycle are also expected to be beneficial.
  • Suncorp announced the sale of the Bank to ANZ on 18 July 2022, with completion expected in the second half of 2023. The sale going through following regulatory approval will bring in additional capital returns to shareholders.

The previous report can viewed by clicking here.

Recommendation

Suncorp has set up defences to mitigate adverse weather impacts in FY23. This should safeguard the firm’s profitability. They have also reaffirmed their target payout range for dividends to be between 60-80%. Additionally, if the sale of Suncorp’s bank assets to ANZ goes through, it should bring additional capital distributions to shareholders. We recommend income investors to ‘Buy‘.

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