Suncorp's strong performance and dividend increase

Company News

by Peter Milios

Shareholders in Suncorp (ASX:SUN) will receive an augmented final dividend of 27 cents per share, following the insurer/banking group's survival through another challenging 12 months, thanks to the third year of the La Niña heavy rainfall.

The Brisbane-based group announced that the final dividend was raised by 10 cents per share from the 17 cents paid in the latter half of 2021-22. This brought the total dividend for the 2022-23 year to 60 cents per share, marking a 50% increase from the 40 cents paid in the previous year.

However, the directors indicated that the 60 cents per share dividend falls at the lower end of its payout range of 60% to 70% of cash earnings. This suggests that the group intends to retain as much cash as possible, considering the uncertainty surrounding the future of its bank following the ACCC's rejection of the $4.9 billion sale to ANZ last Friday.

The reasons behind the higher dividend are evident from the financial results. Suncorp reported a net after-tax profit of $1.148 billion for the June year, as well as cash earnings of $1.254 billion. Both figures significantly exceeded the results from 2021-22, which were negatively impacted by mark-to-market losses on the bank's $16 billion investment portfolio.

Suncorp attributed the improvement to several factors, including the completion of a three-year cost-cutting programme that led to the bank's income-to-revenue ratio dropping to 51% from over 58% the previous year. Additionally, group operating expenses fell by 1.8% over the year.

The improvement resulting from the reduction in mark-to-market losses on the investment portfolio was remarkable. Suncorp reported a net gain of $724 million from yields and investment markets, in contrast to a loss of $190 million in 2021-22. This $900 million turnaround significantly bolstered the bottom line in 2022-23.

Suncorp's primary business is insurance, and higher premiums played a role in the improvement. Gross Written Premiums (GWP) increased by 10.6% in the company's Australian general insurance business and by 14.3% in New Zealand. This improvement was attributed to targeted price increases necessary to address substantial increases in reinsurance and natural hazard costs, as well as economy-wide inflation.

The Group's underlying insurance trading ratio (ITR) rose from 9.0% (excluding COVID-19 impacts) to 10.9%. The improved ratio was supported by revenue growth, better expense ratios in the Australian business, and an increase in investment yields. Margins were affected by rising natural hazard and reinsurance costs, along with claims inflation, particularly in the Motor portfolio.

Suncorp's core insurance business continued to be impacted by heightened natural hazard activity. The third consecutive La Niña weather pattern led to 15 separate weather events and around 130,000 natural hazard claims across Australia and New Zealand. As a result, the Group exceeded its natural hazard allowance by $97 million, with Australia seeing a favourable impact of $2 million and New Zealand facing an unfavourable impact of $99 million.

Looking ahead, the Group's natural hazard allowance for FY24 is set at $1,360 million. The comprehensive reinsurance program was successfully implemented, with premiums higher than the previous year. These changes to the reinsurance program will necessitate an approximately $340 million increase in capital held by the Group.

Within the bank, home lending expanded by 9.1%, providing evidence of improved broker and customer experiences. The decline in the bank's cost-to-income ratio was driven by revenue growth and effective cost management.

Regarding the bank's sale, Suncorp confirmed its support for Australia and New Zealand Banking Group (ANZ) through the Australian Competition Tribunal process for reviewing the Australian Competition & Consumer Commission’s (ACCC) determination. The company expressed confidence in the merits of the case.

CEO Steve Johnston stated that the Group had achieved a robust set of results, demonstrating progress over the past three years in successfully executing strategic initiatives outlined in the FY23 plan, despite the challenging operating environment.

Johnston emphasised, "Our focused efforts on digitalisation, automation, brand revitalisation, efficiency enhancement, and customer service improvement have contributed to significant top-line growth across our businesses and enhanced underlying margins. The strong growth in premiums across our Australian and New Zealand businesses, along with unit growth in Consumer portfolios, underscores the value of our products and brands.

The Bank's ongoing growth in home lending validates the benefits of improved broker and customer experiences."

Peter Milios

Peter Milios is a recent graduate from the University of Technology - majoring in Finance and Accounting. Peter is currently working under equity research analyst Di Brookman for Corporate Connect Research.

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