Sandstone Insights: Suncorp Insurance maintains FY 2025 margin guidance

ASX code: SUN

Suggestion: Hold

Need to know

• Suncorp Group (SUN) has maintained its fiscal year (FY) 2025 margin guidance at the upper end of the 10 - 12% range
• Updated 2025 - 2027 strategy with large focus on systems efficiency/digitisation. Current guidance contains A$560 million tech costs (90% by the end of FY 2027 estimated)
• Suncorp trades on pro-forma post capital return/buyback FY 2025 estimated multiple of 16.5x versus IAG 18.1x.

Suncorp investor day

While Suncorp provided substantial detail on its future operations, much of the focus remains on driving operational efficiencies rather than positioning as a technology leader. The technology capital expenditure (capex) of $560 million will be rolled out over the next 3 – 5 years, with 90% allocated by FY 2027 and 50% amortised.

The national Australian Associated Motor Insurers (AAMI) brand will not transition to a new platform until 2026, and the upgrade will span multiple years. Suncorp has yet to quantify the cost benefits.

Key takeaways:

• FY 2025 margin guidance remains at the upper end of the 10 – 12% range, with consensus at 11.8%
• No additional updates were provided on the $4.1 billion capital management initiative, with timing set for completion by the end of the first quarter (Q1) 2025. Suncorp is guiding towards a 90/10 split between capital return (around $2.90 per share) and on-market share buyback. Suncorp continues to caution that the capital return program is 'subject to the capital needs of the business'
• The 60-page strategy update highlights Suncorp’s focus as a pure-play insurer, emphasising platform efficiency, digitisation, and integrating artificial intelligence (AI) into the insurance process.

Suncorp's operational transformation chart

Capital expenditure and operational efficiency

The majority of investment will remain classified as capex, helping to offset operating cost pressures. Suncorp's expense ratio of 19% in FY 2025 compares favourably with IAG’s 23%, indicating that Suncorp does not currently have a cost issue.

However, investing in business efficiency could support profitability, particularly as premium cycle strength diminishes.

Suncorp's digitisation of the insurance process chart

CEO’s tenure and performance

Steve Johnson has served as chief executive officer (CEO) since September 2019. The FY 2025 – 2027 strategy would see him in the role for more than eight years by the end of FY 2027.

Under his leadership, Suncorp has streamlined into a pure-play insurer, although questions remain about its ability to achieve market-leading growth in the medium term. While organic and inorganic opportunities for capital deployment are yet to be clarified, it is unlikely that Johnson will be responsible for addressing these longer-term growth questions.

Suncorps’s trading multiple

Suncorp currently trades at about 9% price-earnings ratio (PER) discount to IAG, which is consistent with the long-term average since 2014, excluding Suncorp bank earnings. We believe there is potential for Suncorp to close the PER discount to IAG over time, ideally narrowing it to within 5% after the bank sale.

However, due to Suncorp's concentration in Queensland (with exposure to tropical storm costs and reinsurance expenses), a full alignment with IAG's multiple may not be realistic.

Suncorp's pro-forma PER chart

Investment view

Suncorp, excluding its banking arm, trades at approximately 16.6x PER, about 2 PER points above its long-term average. This premium reflects the quality of the business on a return on equity (ROE) basis.

• Capital management

Capital management of $4.1 billion from the Suncorp bank sale proceeds is scheduled for Q1 2025, primarily as a capital return, with Suncorp guiding to a 90% return and about 10% share buyback

• Growth expectation for FY 2025

Suncorp expects mid-to-high single-digit growth in gross written premiums (GWP) and an insurance margin towards the top of its 10 – 12% range. This should deliver a 23 – 25% return on tangible equity, or around 10% return on equity (ROE), approaching peak cycle levels for an insurance firm

• Hold rating

Our hold rating is based on Suncorp's ability to retain market share in a rational market that still supports above-consumer price index (CPI) growth in insurance premiums

• PER multiple potential

We foresee potential for the Suncorp PER multiple to close the gap with IAG over the medium term. In the short term, however, investors may be cautious about narrowing the discount given SUN's higher exposure to Queensland. The forthcoming capital return (around $2.90 per share) and on-market share buyback (about 2% of shares outstanding) in Q1 2025 are likely to be key catalysts for Suncorp .

Risks to investment

Suncorp's business model in insurance inherently involves risk pricing, with numerous external factors potentially impacting earnings and capital.

• Premium increases and claims inflation: lower-than-expected premium hikes or increased claims inflation could reduce expected earnings growth for Suncorp. Rising reinsurance costs may also weigh on profits
• Market competition: an increase in competition in the Australian general insurance market or accelerated market share loss could affect earnings growth. Currently, the market's pricing of insurance policies remains rational.

SUN vs IAG PER chart