Shares in Value Logo
Product Review Img Vertical

Date : 11/07/2022

Suncorp Group

ASX :

SUN

Market Cap : $13.74 Billion

Dividend Per Share : $0.71

Dividend Yield : 6.42 %

Buy

52 Week Range : $10.02 - $13.25

Share Price : $11.05

With strong business momentum and the end of adverse weather conditions, we recommend a “buy” for Suncorp.

Company Analysis

Suncorp Group (ASX: SUN) provides insurance and banking products and services through some of Australia’s and New Zealand’s most recognisable brands. With a heritage dating back to 1902, the Group has expanded to become an ASX-listed company with more than $97 billion in assets. The Group of companies owned by Suncorp Group comprises three core businesses, each of which is well-diversified and covers a wide variety of financial products and services.

Suncorp is a well-diversified company offering a wide range of insurance and banking products and services

Insurance in Australia

Suncorp’s insurance business in Australia delivers insurance for a wide range of categories from home, motor, caravan, compulsory third party, workers compensation, commercial and health insurance. Suncorp offers these insurance solutions in a well-organised manner through a suite of leading insurance brands, including AAMI, Suncorp Insurance, GIO and Apia. The Company is well-established with its insurance products that help millions of people across the country.

Banking & Wealth

Suncorp is well known for its Banks. The Company provides home and business loans, everyday deposit and savings accounts, credit cards and merchant facilities through its banking arm. Its clients are also diverse. The Bank serves families, individuals, businesses, and farmers to plan for their future by providing specific financial solutions to support their activities.

Suncorp in New Zealand

Suncorp is also established in New Zealand. There, the Company delivers consumer, commercial and life insurance products via intermediaries through its brands Vero and Asteron Life, which provide general and life insurance. In addition, Suncorp partners with the New Zealand Automobile Association (AA) to distribute its general insurance products directly to consumers via AA Insurance, a joint venture between Vero and the AA. A second joint venture between the two partners (AA Finance) provides secured vehicle financing. Furthermore, through its Asteron brand, Suncorp is also partnering with the AA to distribute simple Life products direct to New Zealand consumers.

Source: SUN

Suncorp has delivered solid profit growth of $1.03 billion above its pre-COVID NPAT of $0.17 billion

The last two years were challenging for Suncorp with the health crisis and economic uncertainty due to the COVID-19 pandemic. These impacts have lasted with ongoing lockdowns and border closures until recently, with a progressive return to normal. In recent years, Suncorp has experienced many changes, particularly internally with the implementation of the FY23 plan and changes on the Company’s Board. Christine McLoughlin has been a director of the Suncorp Group since February 2015 and was appointed Chairman in September 2018. During the last few years, we have seen Suncorp developing into a more customer-centric and sustainable business. The Company now has a streamlined operating model, introduced in July 2020, aligned around three core businesses:

  1. Insurance (Australia),
  2. Banking & Wealth
  3. and Suncorp New Zealand.

The Company’s restructuring into these three business segments is an excellent strategic move as Suncorp has benefited from a strong positive momentum. Thus, Suncorp’s share price has increased more than 28% since then.

The Company continues to refresh its businesses, revitalising its insurance brands. We also continue to see lending growth returning to Suncorp’s Bank. Since the onset of the pandemic, Suncorp did also pretty well in maintaining its s strong capital position. As part of a more focused strategy, we have also witnessed the Group unlocking value through a range of strategic initiatives involving:

  • The sale of its life insurance business,
  • the sale of the smash repair business,
  • and most recently, the sale of Suncorp’s Wealth business and its share of RACT Insurance.

Overall, we believe Suncorp is now a more relevant and efficient financial service company.

Suncorp exhibits strong cash earnings supporting a consistent dividend distribution

The Group, during FY21, continues to report Net Profit growth with an NPAT up 13.1% to $1.03 billion, reflecting the expansion of the Company’s insurance business in Australia and strong investment returns from its Banking businesses.

In line with an improved Net Profit during the period, Suncorp announced a lucrative fully franked final dividend of 40 cents per share. This brings the FY21 total ordinary dividend to 66 cents per share, representing a payout ratio at the top end of the Company’s target payout range of 60% to 80%. In addition to the ordinary dividend payments, Suncorp is paying a fully franked special dividend of 8 cents per share. The Company has also conducted an on-market share buyback of up to $250 million.

Consistent and growing dividends and the improved net profit clearly reflect Suncorp’s strong capital position. It is worth noting that FY21 dividend payments and the share buyback correspond to nearly $1.2 billion returned to shareholders.

Suncorp Group’s cash earnings are up 42% year-on-year

During the period, Suncorp saw its cash earnings tremendously increase by 42% from its three core businesses:

  1. Insurance in Australia, which 47% of the Company’s NPAT is derived from
  2. Banking, which contributes to 36% of the total profit, and
  3. Suncorp New Zealand, which is adding 17% to the overall NPAT.

Last year was a clear demonstration of Suncorp’s capabilities in adapting its business to generate long-term value. We have seen the Company achieving strong progress on its key strategic priorities and show that it is on track to deliver sustainable returns above its cost of equity by FY23. Suncorp reported strong top-line growth across all its three business divisions. This resulted from the Company’s implementation of a clear set of initiatives to improve performance.

Suncorp continued to drive simplification, including selling its Australian Wealth business to LGIAsuper for $45 million. The Company’s insurance business in Australia and its Banking arm also exited from several underperforming portfolios. We believe divesting these businesses has enabled Suncorp to focus more on delivering stronger returns in its core insurance and banking businesses. The sale of the Group’s 50% joint venture interest in RACT Insurance was also announced last year in July. As the Company exhibits strong cash earnings momentum through a successful operational reorganisation, the Group decided to return its excess capital to shareholders via its fully franked final ordinary dividend of 40 cents per share, together with a fully franked special dividend of 8 cents per share and an on-market buyback of up to $250 million.

Source: SUN

A wise approach to capital management to deliver continuous dividend growth

Suncorp has demonstrated a very effective approach to its capital management. We are convinced that Suncorp’s approach is the most adequate strategy to maintain the right capital structure mix and deliver long-term shareholder value. Furthermore, we believe the Company also has the capital strength to deliver consistent dividends in the long run. We think Suncorp can maintain a payout ratio above 70% of full-year cash earnings.

In addition to strong dividends, Suncorp has up to $250 million of excess capital, which is being returned to shareholders. The Group stated that it will continue to take a conservative approach to capital management throughout FY22 and FY23 as the economy navigates through a few risk events such as COVID-19, inflation and interest rate hike.

What we like about Suncorp is its systematic management approach. It is consistent and efficient. The Company align its decision behind four strategic pillars:

  1. Customer-centric: Suncorp offers digital and personalised experiences.
  2. Technology-enabled: The Company is developing automation and modern technology platforms.
  3. Skilled workforce: Suncorp is empowering its people to make a difference.
  4. Sustainability: Suncorp is committed to building a fair and sustainable industry.

Since this implementation, we have started to see good results. Thus, Suncorp has delivered growth in its core Australian insurance and bank businesses in FY21, resulting in a 42.1% increase in cash earnings to more than $1 billion.

Revitalised Insurance business

Onward FY22, Suncorp continues to revitalise its brands, notably AAMI, one of its Australian insurance businesses, which reached new record levels for consideration nationally, extending its number one position. Moreover, the Company is improving its pricing and risk selection and is delivering enhanced digital-first customer experiences, a key objective, with over half of the Company’s insurance policies now sold through online channels. On the safe side, the Group has made financial provisions for potential business interruption claims of $211 million and will continue to monitor legal proceedings and assess all claims following policy terms and circumstances.

Banking business back on its growth trajectory

Regarding Suncorp’s banking arm, its home lending portfolio returned to growth for the first time in over two years, while loan turnaround times improved to fewer than 11 days, down from 21 days pre-COVID-19. We have seen the Company adopting a targeted growth strategy in its business banking, accelerating its digital adoption in everyday banking and structuring its distribution channels to ensure that the Company is aligned with customers’ needs.

Suncorp’s New Zealand business is driving growth

Suncorp New Zealand has continued to perform well. We have seen the Company driving growth by strengthening its brands and partnerships. Thus, the Company appears to deliver best-in-class claims and create significant uplifts in digital-first customer experiences.

Since FY21, Suncorp has kept simplifying its business further, making it more efficient and streamlined. The Group announced the sale of its Wealth business to LGIAsuper and exited several portfolios and products, including personal loans in its Banking business, travel insurance, and Vero-branded consumer and construction insurance sold through brokers in Australia.

Company Updates

Chart, histogram Description automatically generated

Source: Tradingview: ASX: SUN vs ASX200 12 months share price performance

FY23 onward Outlook: Suncorp is on-track to deliver a superior return-on-equity

Suncorp introduced its FY23 plan in 2021. This strategic initiative aims to transform Suncorp into a growing business with a sustainable return on equity above the through-the-cycle cost of equity.

Suncorp is targeting its Insurance business to reach an underlying Insurance Trading ratio (ITR) for FY23 of 10% to 12%. Regarding its Banking business, the Group aims for a cost-to-income ratio of around 50%. We are confident that Suncorp is on track to achieve this. Hence, the Company is actively investing in 12 strategic initiatives, which we believe will support the Company’s top-line growth momentum, and lowering risks across its businesses, such as reduced claim numbers, lower loss and expense ratios and improved productivity.

Suncorp remains focused on driving improved momentum in its core businesses via continued investments in its strategic initiatives to deliver on its FY23 aspirations. The Group withdrew several consumer insurance corporate partnerships during the first half of FY22. Total Gross Written Premium (GWP) related to these arrangements in FY21 was $69 million and will runoff completely by FY23.

A few issues to consider onward the second half of the year and FY23

  • In FY21, the Group increased its FY22 natural hazard allowance to $980 million. However, reflecting the Group’s natural hazard experience during the half, the full-year outlook for natural hazard costs has increased to approximately $1 billion. Suncorp’s operating performance in the second half of FY22 is expected to benefit from its comprehensive reinsurance programme, with full coverage available under the AXL treaty and other reinsurance covers. Suncorp’s AXL cover and three dropdown covers and reinstatements remain intact, and an additional $75 million of AXL cover was purchased in December 2021, a 50% placement of a $150 million layer above the existing AXL.
  • The NZ Earthquake Commission is expected to increase its cap for house policies by $150,000 effective October 2022. The net profit and loss impact from this change is not expected to be material and will emerge from FY23 onwards.
  • In May last year, the Federal Government announced its intention to establish a reinsurance pool for cyclones and related flood damage in Northern Australia. Suncorp has supported the Government’s efforts to improve insurance affordability in Northern Australia.

Accordingly, Suncorp reiterates its intention to remain prudent with its capital management strategy, including holding an appropriate CET1 buffer at the Group level while remaining committed to returning to its shareholders its excedent capital in the form of buyback and dividends.

Investment Thesis

Suncorp’s first half of FY22 performance demonstrates strong underlying business momentum

Suncorp’s first half of the year result demonstrates strong underlying business momentum and solid progress against the Group’s key strategic priorities. The Group remains on track to achieve its aspiration to be a growing business delivering sustainable returns above its cost of capital by FY23. However, the result was impacted by several natural hazard events and investment market volatility during the half. Despite the first half being quite challenging for the Company, Suncorp’s operating performance in the second half of the year is expected to benefit from its comprehensive reinsurance program with full coverage available under all its reinsurance covers and additional cover purchased in December 2021.

NPAT is affected by natural hazard events, although the resilience of the Company’s cash-generative businesses can cover the interim dividend of 23 cents per share

The number and volume of natural hazard events in the first half of FY22 significantly impacted the Company’s net profit after tax. During the first half of the year, there were nineteen large events, which along with other smaller claims, resulted in total natural hazard costs of $695 million, which was $205 million above the half-year allowance. Despite this, Suncorp was able to maintain its payout ratio at 80% of its cash earnings. Furthermore, the Group’s robust balance sheet and strong reinsurance programme led the Company’s Board to declare a fully franked interim dividend at the top end of its target payout ratio range, along with an on-market buyback of $250 million completed in the first half of FY22, improving earnings per share by approximately 1.6%.

Suncorp Insurance business in Australia and New Zealand continues to exhibit growth

The Company’s Insurance arm in Australia continued to show strong momentum in the year’s first half. Excluding a few exits that Suncorp completed during the period, we have been pleased that the Company reported a Gross Written Premium (GWP) growth of 7.5%, which was strong and broad-based across the insurance business. Regarding Suncorp in New Zealand, its intermediated and direct channels also recorded a strong GWP through a blend of unit growth and targeted pricing increases. New Zealand’s GWP expanded by 14% on PCP.

Suncorp reached $58.6 billion in Bank total lending, up 1.8% on PCP

Suncorp Bank is making good progress on its strategic initiative to win in home lending, growing the portfolio by 2.7% over the first half of FY22. We expect a 5.3% annualised growth of the Company’s lending portfolio. This growth was broadly in line with the system, demonstrating an improving trend over the recent reporting period. Suncorp also saw its Total Bank deposits growing strong, which was quite impressive during the year’s first half with 7.8%, primarily driven by a 12.8% increase in at-call transaction accounts, and supported by a strong digital offering. However, the Bank’s Net Interest Margin declined by 12 basis points during the period to 1.97%, reflecting industry-wide trends. In line with its conservative approach to capital management, Suncorp maintains a strong capital position with its Bank subsidiaries operating safely within their target ranges after paying dividends. The Bank also exhibits a stable outlook with a credit rating of AA- from S&P Global Rating.

9 reasons why we believe Suncorp is a “buy”

1. Suncorp is optimising its margin and reducing its pricing risk: The Group is aggressively investing in a modern, analytics-driven pricing engine to optimise its margins and is reviewing its portfolio management to improve its loss ratios. This has proved effective during the first half of FY22, with the Customer and Pricing Ecosystem (CaPE) successfully deployed for home mass brands.

2. Suncorp is transforming its business into a digital-first customer experience: One of the key initiatives to optimise the Company’s costs is to improve digital sales and service capabilities to enhance customer experience. Suncorp continues to progress in this domain with digital sales. The Company is developing service levels for mass brands across home, motor, and CTP products, which now account for 38% of all sales and service transactions, up from 33% in the first half of FY21. Insurance Australia is on its long-term target of 70% digital and 30% voice in insurance sales and service. The strong unit growth in the CTP portfolio during the half also reflects the benefits of this CTP digitisation programme.

3. Suncorp is tremendously improving its claims performance: The Group is progressing rapidly on its end-to-end claims efficiency and performance, including improving its supply chain, digitising lodgement and tracking. Suncorp aims to become the market leader in natural hazards insurance products. In the year’s first half, Suncorp successfully implemented In4mo, a Property claims Solution to better manage builder allocation to higher performing builders and ICBM, which will allow the Company to better benchmark claims costs against agreed contract rates and industry benchmarks. Suncorp also established its new Home Claims repairer panel of 38, which is expected to drive improved repair quality, capacity and cost outcomes while rationalising its Motor repair panel. Motor and home claim digital lodgements have increased from 21% and 18% to 41% and 36%, respectively, during the year’s first half. Suncorp is also implementing additional enhancements to increase its digital lodgements, with tracking being deployed over the remainder of the Plan period. Moreover, Suncorp will continue to optimise its supply chain, rationalise its real estate footprint and lift team productivity through process improvements. We have been pleased that these initiatives are already driving improved claims performance and loss ratios. We are confident that Suncorp will achieve its FY23 Plan targets.

4. Suncorp is winning in the home lending sector: Suncorp’s Home Lending momentum continues, with the Company’s portfolio ending the year’s first half slightly below system, with a strong pipeline of new business. Although, settlements were up 40% half on half and over 70% higher on PCP. We have seen during 1HFY22 stronger growth driven by better customer and broker experiences following the Company’s investment in process change, expansion of broker support tools and relationships, automation, and simplification, reducing median turnaround times by two days. These initiatives will continue across the end-to-end value chain. Pleasingly, during the year’s first half, the Bank was ranked number two in home loan customer satisfaction.

5. Suncorp is experiencing strong bank customer growth: Suncorp continues expanding its at-call transaction portfolio by 12.8% on PCP. The Bank recently launched its Buy Now Pay Later product, Suncorp PayLater, to provide additional payment flexibility to customers. In line with the Bank’s focus on sustainability and wellbeing, all Debit Cards are now issued with recycled materials and tactile indicators to support vision-impaired customers. We are confident that the Bank is in a good position to keep expanding its main bank customer franchise in the target younger customer segments, leveraging its fee-free status, unique sub-account solution, “PayLater”, and its competitive digital capabilities.

6. Suncorp is expanding its SME lending business: The strength of Suncorp lies in its diversification, from businesses to broad target customers. One of the growth targets for Suncorp is SMEs. The Company has recognised the high potential of this market segment. During the period, Suncorp launched a new fast-track lending process for simple SME lending, focused on reducing turnaround and streamlining applications. In FY23, Suncorp intends to reduce its investment in other strategic priorities and increase its capital expenditure in business banking to expand its partnering capabilities, improve its origination experience, and ramp up its digital sales.

7. Suncorp is optimising its distribution network: The Company continues to expand and upskill direct lenders, delivering leading service and customer experiences through its direct channel. Suncorp improved its customer accessibility via a new arrangement with ATMx, which provides its customers with fee-free access to an additional 1,800 ATMs nationally, installation of braille functionality across the ATM fleet and the launch of Translating and Interpreting Services across branches, business banking and call centres. In line with the increasing customer shift to digital origination and self-service, the Bank will continue to optimise its branch network, focusing on high-value interactions through a blended contact centre and branch operating model.

8. Suncorp is experiencing market share expansion in New Zealand: Suncorp in New Zealand has developed and improved its connectivity to brokers and corporate partners. During the first quarter, Suncorp’s market share in New Zealand increased by 27 basis points, the fifth consecutive quarter of market share gains. AAI and Vero brands remain very strong in the country.

9. The weather is improving in NSW and QLD: Suncorp has been tremendously affected during the past year with heavy rainfalls and flooding in NSW and QLD. Natural hazard costs the Company $695 million, up from $561 million in the PCP and $205 million above the Group’s allowance of $490 million. However, we are confident that the situation is improving. It starts with the weather. According to the Madden–Julian Oscillation (MJO), rainfalls will likely weaken in the coming weeks. Furthermore, last month, the Australian Bureau of Meteorology announced the end of the 2021-22 La Niña in the tropical Pacific.

Chart Description automatically generated with medium confidence

Source: Australian Government Bureau of Meteorology

Recommendation

Suncorp faced difficulties with claims related to the extreme weather and flooding in NSW and QLD, which could adversely increase reinsurance allowances for FY23. This could put the Company at risk of a margin squeeze. However, we remain confident that Suncorp will be able to maintain its consistent revenue stream as we could expect an upside in interest rates to offset this risk. Furthermore, according to the Australian Bureau of Meteorology, the “La Niña” phenomenon of 2021-2022, causing heavy rainfall, has been declared over. The meteorological MJO signal is also likely to weaken in the coming days, which suggests that rainfall and wind patterns are likely to diminish.

On top of improving weather conditions, the Company also exhibits a few positive catalysts. Suncorp has, since FY21, implemented a 2-year Growth Plan which enables critical improvements such as optimised margin and reduced pricing risk leading to a 42% increase in cash earnings year-on-year for the Company.

With a strong business momentum and the end of adverse weather conditions, we recommend a “buy” for Suncorp.

 

Scroll to Top

Login

By submitting this form, I agree to the TERMS AND CONDITIONS and PRIVATE POLICY