Outlook Cautiously Improves For Suncorp

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This story features SUNCORP GROUP LIMITED, and other companies.
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At its latest investor briefing Suncorp highlighted its "marketplace" concept, yet brokers remain focused on the nitty gritty of premium rates and margins.

-Positive customer growth attributed to improved retention in core brands
-Difficult to benchmark the "marketplace" objectively
-Brokers cautious regarding ability to maintain FY17 hazard reinsurance rates
 

By Eva Brocklehurst

At its latest investor briefing Suncorp ((SUN)) highlighted its "marketplace" concept, boosting cross-connect for products and and the ability of customers to use a one-stop shop.

The strategy centres around developing a marketplace for both its own and third party solutions. By providing a single destination for financial needs, Suncorp hopes to deepen customer relationships and improve retention and profitability.

Management also updated the market on some more immediate operating issues. Positive growth in customer numbers has been observed for the first time in years in the key insurance business and this is attributed to improved retention, mainly from core brands.

The company has also flagged an improvement in loss ratios in home and motor, noting operating metrics are back to levels seen before the claims problems of 2015. The main support for this was increases in premium rates in line with the market.

In the banking division, lending growth has improved after a flat March quarter and the company expects the trend to be sustained, as its peers deal with greater macro prudential impacts while smaller lenders have to contend with rising funding costs.

The company also highlighted a belief that it is in a good position to lift mortgage volume, having dealt with many of the new regulatory changes early in the piece.

Goldman Sachs upgrades FY17-19 forecasts for earnings per share by 0.5-1.1% based on slightly improved momentum in personal lines and slightly stronger underlying loss ratios. The broker, not one of the eight monitored daily on the FNArena database, retains a Buy rating and target of $14.44.

Marketplace

While encouraged by early progress on an initiative that was largely a concept a year ago, UBS finds it difficult to benchmark the company's marketplace objectively and the ultimate test is likely to be the delivery of revenue growth in future years. Morgans agrees that the strategy, while logical, is long-dated and there are few data points that enable progress to be tracked.

Goldman Sachs considers the most positive progress, in terms of the marketplace strategy, is the fact the front line of the business has a single view of the customer, and profitability can be monitored at the group level rather than at the brand. Third-party health and annuity products have also been added to the platform.

Credit Suisse points out there is no final time frame to judge the strategy as successful, although management appears upbeat about market conditions in general insurance and banking.

The broker appreciates new initiatives are being funded from operating improvements elsewhere but finds it difficult to draw any conclusion about the earnings opportunity. There is also the question of whether this is an earnings opportunity or whether it is more about avoiding business shrinkage.

Commercial Premiums

Credit Suisse recently downgraded the stock to Neutral from Outperform, following a period of share price outperformance and the closing of the valuation gap to peers, although still prefers Suncorp ahead of the non-general insurance names such as AMP ((AMP)), Medibank Private ((MPL)) and QBE Insurance ((QBE)).

The broker has increased assumptions around the magnitude of increases to premium rates in 2017 and believes local general insurers should be in a position to achieve 3-5% rate increases versus a prior assumption of 1-3%. The changes are driven by the view that commercial lines will improve.

Having said that, Credit Suisse has become more cautious about the ability of Suncorp to renew its FY17 reinsurance program without changes and this may absorb some of the premium rate benefits. Moreover, in recent months the broker's confidence in life earnings has continue to deteriorate.

UBS points to the company's commentary regarding a heightened focus on claims since issues first emerged have enabled it to better manage industry-wide inflation pressures.

The broker also expects the potential for positive real premium rate rises, and greater fixed cost leverage as the top line improves, should provide stronger tailwinds for margins in FY18.

Whether this supports the upside beyond 12% in FY18, the broker believes, depends on the drag from a higher natural perils allowance and lower CTP profitability. These are areas where UBS finds there is less visibility.

Macquarie notes pricing for personal lines has increased and volumes are now positive but the business continues to lose market share. The broker also suspects commercial business will remain unprofitable, even after re-pricing.

CTP

The company has aggressively grown its NSW CTP although concerns regarding regulation have been flagged for both NSW and Queensland in this insurance segment.

The impact of the last-minute NSW government decision to unwind a prior proposal of revoking the fire service levy is unclear, at this point, as to whether it could lead to losses in FY17.

Goldman Sachs also observes a number of unknowns in the CTP market. While there is some headwinds expected to underlying margins in FY18, and benefits are still accruing from improved claims management, the broker suspects absolute profitability may be more consistent.

Citi agrees headwinds in FY18 are likely to include lower Queensland CTP profitability and the probability that the hazards allowance will need to rise at a greater rate.

The magnitude of any rise in FY18 hazards allowance, which received a significant hit from Cyclone Debbie, seems to depend on whether or not the company can renew its aggregate cover at a commercial price.

Nevertheless, the broker acknowledges the customer base is growing in general insurance and premium rate trends are also favourable. The broker also notes that the company expects its banking division to benefit competitively from the levy on the major for rivals and the credit downgrades of the smaller banks.

There are two Buy ratings on FNArena's database, five Hold and one Sell (Morgan Stanley). The consensus target is $13.86, signalling -3.5% downside to the last share price. Targets range from $12.00 (Morgan Stanley) to $14.50 (Credit Suisse). The dividend yield on FY17 and FY18 estimates is 5.1% and 5.4% respectively.

See also Upside For Suncorp From Regulatory Change on May 24 2017.
 

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