Suncorp Group Limited (SUN)
HOLD

Claims inflation challenge

 9 Aug 2023
Sector: Financials

FY23 RESULT

Need To Know

  • FY23 Earnings in-line. Gross Written Premiums (GWP) above market & Insurance Trading Ratio (ITR) in-line. 
  • DPS miss: 60cps vs 71.5 cons. Pay-out ratio lowered (60%) due to conservatism around bank sale.
  • Guidance implies a weaker 1H24 due to persistent claims inflation, particularly in motor.

FY23 Result:

Cash NPAT A$1,254m in-line with consensus. 

DPS 60cps vs 71.5cps cons (16% miss). At the bottom end of the 60-80% pay-out ratio target range. 

FY23 GWP growth was strong at 10.3% vs market at ~9%. FY24 GWP outlook to be above market estimates ("around 10%" vs market at ~7.5%). 

ITR 10.9%, at the midpoint of guidance (guidance 10-12%). FY24 guidance suggests ITR falls to the lower end of this range (market at the higher end).

Key Issues (Motor): Claims inflation in motor and higher re-insurance remain the key issue for the lower FY24 margin (ITR). Motor inflation is expected to moderate in 2H24 (currently mid-teens) with margins expected to return to target by the end of FY24. Frequency, parts, labour, and paired with lower capacity are elongating the duration of claims which is impacting the cost line.

SUN Bank: Bank sale costs are expected to increase from ~A$500m to A$575-A$600m and deal completion is not expected till mid-CY24. SUN remain confident that the bank sale will go ahead via Australian Competition Tribunal (ACT). In the case it doesn’t, the bank will require “reasonable CAPEX”. We expect SUN will need to find an alternative buyer (at a lower price) in mid-2024.

Outlook: Consensus GWP will need to be upgraded (market at ~7.5%) however the underlying ITR will need to be downgraded (market at top end of guidance range). As a result, we expect EPS estimates to be largely flat. 

Suncorp remains committed to a 60% to 80% pay-out ratio for FY24, noting the FY23 pay-out was due to capital conservatism. 

Higher claims inflation relative to market expectations reduces EPS upside in the near term. Regulatory outcome on the bank sale appeal is not expected till mid-2024, delaying any prospect of capital management. We maintain our Hold rating.

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Stock Overview

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Company Overview

SUN is an Australia-based company that provides insurance, banking, wealth products and services through various brands in Australia and New Zealand.

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