Weather the Storm(s)
Suncorp (ASX:SUN) has just issued an update on the ex-Tropical Cyclone Kirrily as well as can overview of key metrics for 1H24. So far, the total cost of natural hazard events for 1H24 is expected to be $568 million, driven by six significant events, including rain, storms, hail, cyclones, and holiday-related storms. Despite the challenges, Suncorp anticipates strong top-line growth in the general insurance businesses for 1H24, with underlying margins expected to be within the 10% to 12% range.
Before moving on to the update, a look at the technicals and Suncorp continues to test overhead resistance at the $15 level on the 20 year monthly chart below. A breakout looks to ensue this year, which is line with a general rerating of insurance stocks globally.
Trading Update – Cyclone Kirrily and 1H24
Recently, there was some hubbub about Suncorp issuing an update on the ‘ongoing weather events’ that have had an impact in Queensland, NSW, VIC and ACT since November 2023. This time, Suncorp has provided more details showing the initial market concern was largely immaterial.
The insurer also provided an update ex-Tropical Cyclone Kirrily, with just over 500 claims received, mostly related to home claims. The pleasing part about the update here is that claims related to this have been less than expected as affected communities experienced less damage as the cyclone weakened ahead of impact.
Moving on and, Suncorp announced that total natural hazard costs for the 1H24 have amounted to some $568 million. The Six significant events contributed to this cost, with a breakdown of losses from events such as November Rain and Storms, December Hail and Rain, Cyclone Jasper, Southern States Storms, SE QLD NSW Storms, and East Coast Holiday Storms. The image below summarises these titbits of info:
Source: Suncorp January 2024 Trading Update
So far, the Natural Hazard costs have all been within the budget which was set at $1.36 billion. This shows that the costs, so far, have all been well under budget with utilisation well below 50% of its budget at the halfway stage.
Regardless of an uptick in weather events, we believe that Suncorp remains well placed though a hefty combination of reserve strengthening (more on this later) and a prudent reinsurance program. For the latter, Suncorp currently implements comprehensive reinsurance program with a maximum event retention of $350 million for the main catastrophe program for the first event. While there is also a dropdown aggregate protection offers additional cover for medium-sized events. And for QLD, specifically, a 30% quota share arrangement relates on the Queensland Home portfolio.
Simply put, this means that there are reserves that have been move away from the balance sheet with reinsurance and that is already priced in the premiums Suncorp charges customers. Pretty standard but is a good reminder that weather events (even if they get sizeable) won’t deliver a knockout punch to Suncorp.
That said, Suncorp continues to shore up reserves. In the prior years, prior to the 1H24 update, Suncorp strengthened this base by a total of $107 million pre-tax, driven by external challenges facing the insurance industry.
On a segment basis, this is split between the Motor portfolio with $56 million of reserve strengthening offset by a $54 million loss component release. The strengthening was due to repair costs and extended repair times associated with COVID-related supply chain issues.
Looking at the Home portfolio, reserves here were strengthened by $32 million, primarily due to water damage claims and large fire claims. Finally, Commercial & Personal Injury saw a net strengthening of $18 million, attributable to increased reserving on lump sum costs in Workers Compensation in Western Australia.
1H24 Financial Performance Expectations
Moving on ahead, Suncorp also provided some clarity on what to expect for the 1H24 – the financials are expected to be released on February 26, 2024.
So far, management notes that there was strong top-line growth across the general insurance business and that the gross written premium growth ahead of guidance – all good signs. FY24 underlying margins are expected to be in line with previous guidance of around the midpoint of the 10-12% range.
Investment income for insurance funds and shareholders’ funds is expected to be in line with previously communicated sensitivities for both yield and mark-to-market.
We’re please with the financial updates and expect a good outcome for the 1H24. This might also be why Suncorp shares are holding well, technicals-wise.
Suncorp Bank Sale Separation Costs
Finally, Suncorp has provided an update on the costs related to the planned sale of Suncorp Bank to ANZ. Management notes that there is a change in the phasing of separation costs, with approximately $70 million post-tax expected to be incurred in each of 1H24 and 2H24.
This update does not dramatically change our expectations on the $4.9 billion sale of the banking arm. We continue to expect developments, or, at best, completion of the transaction around the middle of this year with the Australian Competition Tribunal decision on the appeal is still pending.
A quick reminder on this and we believe that should the sale push through, Suncorp shares could see upside of between 4% and 12% while a healthy influx of substantial capital that could further support strategic investments such as acquiring more insurance operations (such as Zurich’s general insurance arm).
All in all, the updates were pleasing ones and we continue to look forward to the successful sale of the banking arm which would free up capital to further expand the insurance business.
In the interim, while we wait out the ultimate decision from the Australian Competition Tribunal, we maintain our HOLD rating on Suncorp (ASX:SUN). We will revisit this rating around February unless there is a major catalyst that will change the investment case in the near term.
