Suncorp: Banking on a Clean Exit as Outlook for Insurer Profitability Improves

Suncorp SUN shares have risen around 20% in the last 12 months and now trade in line with our AUD 13 fair value estimate. On a forward P/E of 14 times and fully franked dividend yield of 5%, we think the earnings recovery after some difficult years is finally being priced in. Three sequential La Nina years had resulted in a material increase in large natural hazard claim costs.

The momentum in home and motor premium increases, plus higher investment income, are tailwinds supporting our earnings outlook and should more than offset claims inflation pressures. Based on Australian Prudential Regulation Authority data, industrywide gross written premiums increased 14% in the March 2023 quarter. However, the industry data suggests claims pressures have persisted. In motor the loss ratio of 78% is up from 75% in the March-2022 quarter, albeit down from 79% in the December 2022 quarter. The loss ratio for home was steady at 82%.

Our forecasts assume no-moat Suncorp records GWP growth of 8% in fiscal 2023 and 4% in 2024, with portfolio exits. Our loss ratio of 74%, down from 76% in the first half, may prove too optimistic given industry data. But, if claims inflation remains higher than expected, due to the number of claims, labour and material costs, or large hazard events, premium increases would likely persist at higher levels than we currently factor in.

We think the market is pricing in the sale of the bank, given most listed banks currently trade at material discounts to our fair value estimates. With a decision by the Australian Competition and Consumer Commission due by the end of July 2023, we continue to expect the sale of Suncorp Bank to ANZ Group will complete in second half of 2023. Approval remains uncertain, but in our view, Suncorp does not drive price, innovation, or product development any more than the long list of other banks competing in the market; hence we do not believe the acquisition materially decreases competition.