Suncorp Earnings: Brace for More Price Increases as Cost Pressures Persist

Suncorp’s SUN fiscal 2023 cash profit increased 86% to AUD 1.25 billion, 6% shy of our AUD 1.33 billion forecast. The miss is down to the New Zealand insurance profit being far weaker thanks to natural hazard events. Propelling the result was the Australian insurance division, where profit leapt to AUD 755 million from just AUD 174 million last year. Price increases drove 10% growth in gross written premium, but the claims ratio was modestly higher, leaving investment income on shareholder and policyholder funds of AUD 504 million to do the heavy lifting. Higher cash rates provided a nice tailwind to insurance earnings and a smaller contribution to the 28% increase in Suncorp Bank profit to AUD 470 million.

Suncorp noted ongoing claims inflation pressure, particularly in motor, which brings with it an expectation that insurance prices will keep rising. It is guiding to 10% premium growth in fiscal 2024. The rising cost of insurance and cost of living pressures could see increased customer switching, but at present the industry is repricing to improve profitability to a reasonable level. Return on equity of 9.6% in fiscal 2023 is hardly high enough to invite increased competition. Policy cancellations and downgrading could be a bigger threat to volume and profit in the short term. Suncorp said some customers are changing excess levels to save money on premiums and shopping around more, but retention rates remained high.

Our fair value estimate increases 4% to AUD 13.50 on the time value of money. Shares have performed well since late 2022 and trade in line with our fair value estimate. Suncorp targets an underlying insurance margin of 10%-12%. With significant repricing and investment income now contributing, we think this is achievable and forecast a midrange margin of 11% in fiscal 2024. For Suncorp Bank, our forecasts are in line with guidance for fiscal 2024 net interest margin to be at the low end of management’s 1.85%-1.95% target range.