Suncorp (ASX: SUN) – Smooth Ride Ahead

Henry Fung

Henry is a co-founder of MF & Co. Asset Management with over 20 years of experience as a trader, investor and asset manager. Henry also maintains a high conviction list of 5 stocks that you can get for free here.

January 24, 2025

Suncorp is a major general insurance firm operating in the ANZ region. After a rough couple of years due to inflation and heightened claims, the company is back on track with a strong modernization program to drive efficiency and better macro conditions. 

Moderating inflation has lowered claim impact, improved demand, and reduced reinsurance costs. Further, its recent divestment program will unlock value for investors through buybacks and dividends while improving operations due to a lower regulatory burden.

Suncorp is on a strong wicket, we dissect this opportunity below.

About Suncorp

Suncorp (ASX: SUN) is one of the ANZ region’s largest property and commercial insurance providers and the largest listed pure-play insurance player in the region. The company also operated small franchises in banking, wealth management, and life insurance, but has recently divested those.

Suncorp enjoys a top-five market share across most verticals and is even better in its core offerings. The company operates various brands across the ANZ region, each focused on geography and offerings. At the time of writing, Suncorp has a market capitalization of A$25 billion.

SunCorp Brands

 Source – FY24 Strategy Day

Dominant Business With Low Growth Capital Requirements

Suncorp (ASX: SUN) is a strong moat business in an essential sector with growth tailwinds. The strength of Suncorp’s business is best reflected in its strong market position in all verticals. The insurance sector is a low-margin, high trust, and high switching costs business with low growth capital requirements.

SunCorp Market Position

 Source – FY24 Strategy Day

Suncorp’s market expertise and dominance are shown in its top decile risk-return profile and reserve liability matching. The company is also a market leader in expense ratios, claim settlements, and policy originations.

This highlights a unique strength of Suncorp’s business model, as capital-light business models are usually accompanied by low barriers to entry. The company has recently announced at its Investor Strategy Meet that after the sale of Suncorp Bank, the company targets a payout ratio of 70%-80% of cash profits, with growth being comfortably funded by 20% of profits. 

The recent sale of Suncorp’s bank assets and its NZ Life business has freed up capital for growth and shareholder returns while the company’s regulatory reserve requirements have reduced meaningfully allowing capital allocation freedom and enhanced returns.

A major tailwind for the company at present is moderating global inflation and interest rates. Inflation had been a major headwind for the company as it elevated claim costs and in turn, premiums which reduced growth and demand. 

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At the same time, monetary policy response to inflation raised interest rates, which manifested in elevated reinsurance costs. With new capital from asset sales and lower interest rates, the company has been able to meaningfully increase its reinsurance cover.

Lastly, Suncorp also enjoys the highest net promoter score and national brand awareness in the industry.

Overall, the company is a dominant player with a strong moat in one of the best-regulated and profitable insurance markets in the world. It is well poised to deliver strong shareholder returns given the low growth capital requirements of the business.

Macro And Regulatory Exposure Are Weaknesses

A major weakness for Suncorp (ASX: SUN) is the macro sensitivity of its business and regulatory risks. The company has strong exposure to both inflation and interest rates. The company has mentioned recently that higher costs have led to customer complaints and some opt-outs during the past inflation crisis. 

While inflation has begun to moderate, it is still proving to be sticky on the way down. A longer-than-expected timeline to taming inflation and higher-than-expected interest rates could prolong growth for the company and moderate demand.

Another weakness is regulatory exposure. The insurance sector is subject to rigorous scrutiny with respect to capital reserve requirements while also being of interest due to cost of living challenges. Any adverse regulation could meaningfully impact the company’s prospects.

Cloud Digitization Of Operations And AI Are Big Opportunities

The biggest opportunity on Suncorp’s (ASX: SUN) radar is digitization and GenAI to lower costs, drive sales, and settle claims faster. However, the company’s extensive digital transformation poses execution risk over the next couple of years.

SunCorp Digitization

 Source – FY24 Strategy Day

SunCorp has doubled down on increased digitization of operations and a complete shift of legacy systems toward the cloud. The company is currently in the midst of its massive Digital Insurer program, which intends to deliver the benefits listed above, improve risk management, allow dynamic real-time pricing, and modularize its technology platform.

The Digital Insurer Program with GenAI is intended to create 100% digital products and is the last and most extensive leg of the company’s Operational Transformation Program. The potential opportunity for the company should it execute this program well is huge as initial efforts under the program have delivered huge results. 

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Over the past 4 years, Digital Sales have gone up to 75%, Digital Service up to 48%, and Digital Claim Settlements have gone up to 50% from 20%. Overall, initial efforts under the program have already driven down the company’s total expense ratio from 23.1% to 19.6%, a reduction of 16%. (Expense Ratio is the ratio of an insurer’s operating costs to its premiums collected).

Other new technology opportunities include the use of vehicle data and smartphone data to evaluate driver behavior and dynamically reward good behavior with lower premiums and vice-versa. Suncorp is actively rolling out this offering.

SunCorp Driver Insurance Rewards

 Source – FY24 Strategy Day

As far as AI goes, the company has identified 100+ use cases and has deployed 20 cases for testing. Initial plans include precise summarization of claims under an AI dashboard for the company’s agent, and a company-wide AI search platform (SunGPT deployed on Microsoft Cloud) for rapid access to knowledge and information for all employees.

Extreme Climate Is A Serious Threat

A major threat faced by Suncorp (ASX: SUN) is an unexpected number of long-tail climate events. Suncorp and other property insurers use advanced modeling techniques combining real-time and historic data sources to ascertain climate risks.

Should these models fail to accurately predict adverse weather events, such as the shocking fires in Los Angeles, or underestimate their severity, it could lead to major claims being faced by the company.

Suncorp has stated that its risk management framework is designed to outperform peers when weather events are large in number but small in nature. However, its framework will underperform those of its peers when climate events are small but large in nature.

This represents a particularly heightened threat to the company as we are currently in uncharted waters as far as global climate is concerned as many events and climate data off-late have not matched previous patterns.

Major climate events may even prompt adverse regulatory action from the government or cause a steep increase in premiums to cover uncertainty, which may hit earnings or drive up costs, thereby hitting demand.

Suncorp Financials

For FY24, Suncorp (ASX: SUN) reported strong results across both insurance and bank divisions. The company reported strong growth of nearly 14% in premiums and received substantial earnings from investment income, which grew by a strong 69%. 

SunCorp Financials

Source – FY24 Investor Presentation

For FY24, the company made a net profit of A$1.197 billion with cash earnings totaling A$1.372 billion, representing a strong cash flow generation to net profit ratio of 114%.

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The company’s net margins in the insurance business expanded by 1.5% to 7.6%, an improvement of nearly 25% over the previous year when the company was suffering the impact of inflation on demand and high claims from natural disasters.

Suncorp reported substantial growth in both consumer and commercial insurance which saw gross premiums rising by 13.7% to A$7.52 billion for the former and rising by 11.3% to A$3.95 billion for the latter.

Suncorp Bank’s performance has been excluded from the above as the company has divested its banking business to ANZ in a $4.1 billion all-cash sale. The company intends to tend much of the cash received from the sale to shareholders and use the remainder to fund growth investments, primarily its extensive digitization program.

For FY25, the company expects to grow premiums by mid to high single digits on the back of lower inflation and cheaper reinsurance costs. At the same time, it expects its investments in operations will keep expense ratios flat before lowering further after its program is complete by the end of FY26.

As mentioned above, Suncorp intends to pay between 60%-80% of cash earnings depending on circumstances, and a dividend of 0.78 cents per share for the year ended in FY24.

Suncorp Valuation

We will be comparing Suncorp (ASX: SUN) to Insurance Australia Group (ASX: IAG) and QBE Insurance (ASX: QBE). Between the three, they have north of 60% market share of the ANZ region’s general insurance market.

As you can see, Suncorp is cheaper than IAG on earnings and cash flow and more expensive than QBE on both, however, QBE’s mower ROE and market share warrant its lower valuation. While Suncorp has a lower ROE than IAG, the sale of the bank and life insurance business in NZ will lead to higher ROEs. 

Suncorp has better net margins and dividend yield than both major competitors.

Suncorp – Low-Risk Growth

Overall, Suncorp (ASX: SUN) is a winning proposition in the insurance space with a dominant market share and a non-discretionary product. 

The company has an industry-leading margin, offers a crisp dividend, and enjoys high barriers to entry due to strong regulation and low absolute margins. 

A major draw for investors is its low capital requirements to fund growth, freeing up resources to drive returns through buybacks and dividends. 

An improved business demand and macro environment should mesh well with operational improvements to deliver strong growth for investors.

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This is general advice only. MF & Co Asset Management has not considered your personal financial needs, objectives or current situation. This information is not an offer, solicitation, or a recommendation for any financial product unless expressly stated. You should seek professional investment advice before making any investment decision.

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