Treasure Chest: Suncorp To Acquire Nib?

This story features SUNCORP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: SUN

By Greg Peel

The following is but analyst theorising and not indicative of any known M&A move afoot.

Suncorp ((SUN)) has long struggled as an uneasy conglomerate of banking and insurance, particularly since the GFC with respect to banking. With respect to insurance, the general insurance industry has been enjoying more profitable times of late but this has been countered by a seriously detrimental shift in the dynamics of the life insurance industry. Suncorp is not the only insurer to feel the impact of problems in Life. Its insurance peers and the wealth management arms of its banking peers have also suffered the effects.

In 2007, then Suncorp-Metway acquired listed insurer Promina. Since the acquisition, Suncorp has suffered from a return on equity drag due to the extra capital required to support the goodwill included in the acquisition price, notes Bell Potter. The broker believes Suncorp has the opportunity to improve its below-industry return on equity from a tepid 8.6% to as much as 12% without having to write down the goodwill inherent in Promina and without relying on additional in-house synergies.

All Suncorp has to do is divest of its Bank and Life businesses and with the proceeds acquire listed health insurer Nib Holdings ((NHF)).

The mechanics of health insurance are more common with those of general insurance than with life insurance, suggests Bell Potter. As a health insurer, Nib is forced to operate in a tighter regulatory environment but the broker feels the company has greater freedom and flexibility as a specialist insurer to increase premium rates ahead of GDP growth over time. Nib is also a well-run company, the analysts believe, and an acquisition would provide scope for extracting synergies from shared services.

Were Suncorp to decide to divest only of its Life business, some $450m in tier one capital would be released but there would be very little impact on group performance, Bell Potter suggests, and indeed return on equity would be lowered to 8.3% from 8.6%. Were Suncorp to divest of both the Life and Bank businesses, $2.5bn in tier one capital would be released, return on assets would triple to 3.8%, and return on equity would rise to 11.1%, the broker calculates, which is “exactly where it should be” were Suncorp simply a general insurance business.

But were Suncorp to use the proceeds of the divestments to acquire Nib, return on assets would rise to 4% and return on equity to 12%.

Bell Potter has thus set its price target for Suncorp at an estimated break-up value of $14.50. The highest target set by brokers in the FNArena database at present is $14.00 (BA-Merrill Lynch) and the average among the eight brokers is $13.30.

Bell Potter maintains a Buy rating on Suncorp, as do two of the FNArena database brokers (Merrills, CIMB). The other six rate SUN as Hold or equivalent.
 

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