Suncorp reveals massive hikes in car, home premiums as half-year profit jumps

The company is paying a dividend of 33¢, higher than the previous corresponding period’s 23¢ payout.

Suncorp shares were trading up 47¢ to $12.94 in the afternoon. While cash earnings missed market estimates, some analysts remained upbeat.

“We see this as a solid result with underlying trends largely in line with expectations, albeit a little worse in [New Zealand] and better in the bank,” Citigroup analyst Nigel Pittaway said.

Hunter Green analyst Mark Tomlins said a “reduction in operating expenses was a credit to Suncorp [but] investment income … was weaker than expected”.

Higher premiums

Earnings at Suncorp’s Australian insurance arm, whose brands include AAMI and Apia, more than doubled to $276 million.

That was assisted by a turnaround in investment returns and releasing $150 million in provisions previously set aside for potential COVID-19-related business interruption claims. Insurers recently won a final round of legal test cases about whether they had to pay out such pandemic-related claims.

Overall gross written premium, measuring price and customer number changes, rose 9 per cent to $4.8 billion in Australia.

Motor insurance premiums spiked, with average premiums up 8.9 per cent. In the previous June results, that figure was 4.9 per cent.

A survey by the Financial Review of accounts going back to 2010, when Suncorp began splitting out average premium rises, indicates the previous highest average rises were in the 5 per cent region.

“Motor, I couldn’t point to one period where we’ve seen [average premium growth] ahead of 10 per cent,” Mr Johnston said.

He pointed to inflation rapidly rising, similar to comments last week from rival IAG.

“Cars in the last 12 to 18 months have been driving out of the showroom and appreciating [in value],” he said.

That meant when smashed cars were replaced, the cost was “materially more expensive” than previously assumed.

The bulk of Suncorp car policies are based on agreed value, rather than market value. But Mr Johnston – whose family car was wiped out a couple of weeks ago – said this still flowed through to higher costs.

Analysts questioned the motor inflation outlook. Mr Johnston said second-hand prices seemed to be coming off their peak.

Parts prices, which had also jumped, were easing but had not yet moved materially, he said. But parts were also more available, helping repairs finish quicker and so more cheaply.

“The key element that’s a bit harder to predict is just this labour supply [shortage] within repair shops and how that flows through to productivity,” he said.

“Generally, they’re heading in the right direction [these motor factors], but the pace at which they disinflate over the second half is a bit hard to be precise around.”

Suncorp said pressure ensued as average claim sizes increased “by low double digits” and driving patterns returned to normal following the ending of lockdowns from the pandemic.

No price gouging

Average home premiums lifted 10.7 per cent, extending recent increases. The average takes into account different factors, such as people being willing to take on higher excess levels before their insurance kicks in, so the sticker price rise can be even higher.

That rise has only been surpassed in the past decade when home insurance rose 12.2 per cent in 2013. That followed massive flooding in south-east Queensland, which Mr Johnston said then led to higher costs.

He maintained price gouging was not occurring, pointing to a 17 per cent rise to $573 million in the cost of Suncorp’s own reinsurance – insurance for insurers in big catastrophes.

Another pressure he highlighted was Suncorp’s allowance for natural disasters, such as flooding or hailstorms, having lifted 18 per cent to $580 million. Even then, wild weather during the six months, including Victorian floods, meant actual hazard costs were higher than budgeted at $679 million.

Suncorp’s margins still improved, and its underlying insurance trading ratio lifted from 8 per cent to 10 per cent. Its full-year target is between 10 per cent and 12 per cent.

The higher premiums triggered some bleeding in customer numbers “across mass brands … driven by lower retention rates as price increases flowed through the portfolio”, Suncorp said.

Still, Suncorp’s overall home policies rose 1.4 per cent “driven by landlord policies in the Terri Scheer Insurance brand”, its accounts said.

The company’s New Zealand arm posted an 8 per cent rise in profits to $NZ91 million ($83 million). Suncorp confirmed flooding in the past fortnight in Auckland would probably cost $NZ50 million, the level at which its own reinsurance protection kicks in.

Suncorp chief financial officer Jeremy Robson added this cost could potentially then head into the group’s main reinsurance catastrophe program, where reinsurers pick up the bill after such costs exceed $250 million. “We’re still going through the assessment,” he said.

The banking arm’s loan book rose $2.8 billion to $64.9 billion as of December. Home loans rose $2.6 billion – almost 10.4 per cent on an annualised basis, as Suncorp aggressively offered cash back payments of $4000 on loans over $1 million.

Mr Johnston linked the rapid rise to measures such as increasing satisfaction levels for brokers using Suncorp. “[Growth] hasn’t come at the cost of credit quality,” he said.

The portfolio was “yet to reflect signs of distress” and only took a bad debt expense of $2 million. The bank also said its cost to income ratio, a measure of efficiency, hit 49.9 per cent. That meant it met a target of below 50 per cent, which has long eluded the bank.

That was helped by bank margins jumping, and the division’s profits leapt 28 per cent to $256 million.