New-Look Suncorp Ready To Rumble

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Stripped of its banking division, standalone insurer Suncorp has outlined ambitions for modernisation, market share gains and capital management.

-Insurer Suncorp to invest in technology modernisation
-Funding from bank and NZ Life sales, with margin guidance unchanged
-Targeting increased general insurance market share gains
-Capital to be returned through dividends and buybacks

By Greg Peel

Last week Suncorp Group ((SUN)) hosted its first investor day as a standalone insurance company post the divestment of its banking division to ANZ Bank ((ANZ)). Suncorp expects the net proceeds of the banking division to be some $4.1bn, to be returned to shareholders around the end of the March quarter next year, “subject to the capital needs of the business”.

The investor day revealed an increasing focus on technology modernisation and simplification, enabled by investment in two strategic initiatives: platform modernisation, centred on the Digital Insurer platform transformation; and operational excellence, which includes the deployment of new AI capabilities.

While Suncorp has completed a number of IT transformations, UBS notes, upgrading customer interfaces, core data and pricing platforms and migrating to the cloud, it continues to run legacy 1980s policy administration systems (PAS). A new $560m technology investment program will enable Suncorp to upgrade its PAS with 90% of the spend by the end of FY27.

Crucially, UBS declares, with the step-up in digital investment captured in the existing expense ratio envelope, Suncorp still expects to deliver “towards the top” of its 10-12% insurance trading ratio margin range in FY25. Guidance for margins towards the top of the range is unchanged, despite the insurer planning to spend -$560m on technology. The sale of the New Zealand Life business is nevertheless expected to provide $270m.

While Suncorp has delivered stronger volumes than Insurance Australia Group ((IAG)) in recent years, UBS suggests closing the technology gap to newer entrants should further assist on the growth front.

Technology investment appears sensible, notes Macquarie, but could ultimately challenge investors’ expectations that the full $4.1bn of net bank sale proceeds will be returned in March.

As the premium cycle begins to wane following several years of compound rate increases, Jarden believes this investment should position Suncorp well to defend its current market share and to pursue organic growth.

The insurer’s new ambition is to reach number one market share in Australian Motor and Home insurance and number two in Australian Commercial, all within target margins.

Clearly, says Citi, Suncorp is aiming to modernise itself as quickly as possible. Whether this will merely bring it up to competitors or take it ahead of them is harder to determine.

Reinsurance

Suncorp’s reinsurance program closely matches that of IAG, notes Ord Minnett, except in years with multiple large events in which Suncorp’s exposure is higher. Suncorp plans to review its reinsurance options at the next fiscal year 2026 (FY26) renewal. While it may replicate IAG’s catastrophe stop-loss cover, this could lead to earnings downgrades to fund the cover, Ord Minnett warns, assuming IAG does not advance in the meantime.

Still cognisant of investor focus, Citi suggests, Suncorp promises to explore new types of cover but suggests timing, the political landscape and sustainability are important considerations. Management has, however, promised to update the market further on this alongside its FY26 program renewal.

The insurer’s current view of reinsurance rates on 1 July 2025 is these are likely to be off slightly and it believes Hurricanes Helene and Milton will not have a significant impact on Australian/NZ pricing.

With IAG’s new stop-loss reinsurance cover sustaining its PE premium of some 10% (FY26 forecasts) to Suncorp despite the bank sale, Suncorp will look to review its reinsurance structures into FY26. Consistent with UBS modelling, the insurer believes a stop-loss would deliver broadly equivalent earnings on average relative to its current traditional structure.

As such, whilst economic benefits are less clear, UBS sees upside value optionality here given the premium being placed on lower volatility.

While Suncorp assumes marginally more volatility, it is not prepared to “pay profit away in the form of margins to reinsurers,” Macquarie notes. Suncorp will continue to reassess its reinsurance options, but the timing remains subject to the market pricing cycle.

Capital Management

Suncorp plans to take a conservative approach to managing its balance sheet, and will operate capital in the “top half of the target range”. The plan is to periodically return capital “in excess of the needs of the business” via active on-market buy-back facility.

The dividend payout ratio target is unchanged at 60-80% with 20% of earnings to be used to fund business growth and the remainder to fund buybacks, with help from the NZ Life sale proceeds.

UBS continues to see capital management as an upside risk to earnings with Suncorp confirming NZ Life sale proceeds will seed an ongoing buyback facility boosted by some 10% per annum surplus earnings retention, supporting UBS’ $225m per annum buyback outlook.

Morgan Stanley thinks to achieve its return on tangible equity ambition, Suncorp will need to increase its use of gearing via debt and/or reinsurance. This broker believes this could lead to Suncorp returning up to $7bn of capital over the next few years, including the $4.1bn from the bank sale net proceeds.

Suncorp flagged it has $510m surplus capital post the bank sale via stranded hybrids, though gave no indication of how it will be used.

Preference Divergence

Suncorp suggested at the investor day motor pricing has started to come off a bit, as expected, although home is largely holding firm. In personal injury, the insurer is seeing prices go up a little more than expected, primarily reflecting a lift in claims frequency in NSW CTP. Management also flagged some portfolios in commercial have seen pricing come off a little more than expected.

This appears consistent to Citi with other industry feedback with inflation softening in NZ also flagged. Cit retains a Neutral rating.

Pro-formas for expectations after the bank and NZ Life sales should “clean up” consensus, Macquarie suggests, which will assist the broker in being more constructive on the stock. In the interim, understanding market expectations is proving difficult, thus Macquarie maintains a Neutral recommendation.

Suncorp is well-managed, Ord Minnett suggests, operating at a market-leading expense ratio and top margin, and the shares trade at a PE discount to IAG’s. Despite an Accumulate rating on Suncorp based on upside to the broker’s price target, IAG remains Ord Minnett’s preferred insurer at current prices.

While UBS’ earnings forecasts and target are unchanged, this broker believes risks remain skewed to the upside, reflecting scope for lower inflation to boost near-term insurance trading ratio margins, growing potential for catastrophe budget beats and PE re-rate potential reflecting greater acknowledgment of capital management and reinsurance optionality.

While QBE Insurance ((QBE)) remains UBS’ top general insurance pick (Buy), UBS prefers Suncorp (Buy) over IAG (Neutral) across domestic general insurance.

At its investor day, Suncorp re-affirmed guidance and stated an ambition to lift its return on tangible capital. Morgan Stanley thinks investors will welcome this, retaining an Overweight rating.

Of the six brokers monitored daily by FNArena covering Suncorp, four have Buy or equivalent ratings and two are on Hold, noting Morgans (Add) has not updated on the investor day. The consensus target is $19.14, on a range from $17.00 (Macquarie) to $20.50 (Morgan Stanley).

By comparison, IAG has three Buy and three Hold ratings, while QBE has six Buy and one Hold (with Bell Potter the extra broker).

Goldman Sachs is favourably disposed to Suncorp, noting in large part the tailwinds that exist in the general insurance market in the form of strong premium rate increases. Suncorp’s underlying margins are also expected to stay within 10-12% with rate increases largely offsetting yield pressure into FY25-26. Separate to the broker’s thesis, Goldman also sees possible catalysts on the horizon including alternative reinsurance structures similar to IAG.

Goldman Sachs is Buy-rated, with a $19.20 target.

While the benefits of Suncorp’s technology modernisation program are currently unquantified, Jarden notes, with the cost of implementation embedded within existing margins, successful execution on initiatives could underpin upside over the medium term. Overall, with margins for Home insurance likely to recover and further optionality should Suncorp secure an alternative reinsurance program, Jarden retains an Overweight rating and $17.50 target.

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