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Suncorp (ASX:SUN) share price drops despite strong $1.25 billion FY23 profit

The Suncorp Group Ltd (ASX: SUN) share price has fallen 2% even though the insurer reported a strong FY23 result.

Suncorp is best known for its multiple insurance businesses such as AAMI, GIO, Bingle, Apia, Shannons, Teri Scheer and Vero. Suncorp Bank is the banking division.

FY23 result

Here are some of the highlights from the 12 months to June 2023:

  • Cash earnings increased by 86% to $1.25 billion
  • Group net profit after tax (NPAT) went up by 69% to $1.15 billion
  • Australian insurance gross written premium (GWP) increased 10.6% to $10.2 billion
  • New Zealand insurance GWP increased 14.3% to NZ$2.4 billion
  • Bank home lending grew by 9.1% to $54.8 billion
  • Final dividend of $0.27 per share

What impacted these numbers?

The business said that its profit was hurt in FY22 from declines in its investment portfolios, but this time it made investment market returns of $724 million.

Suncorp put its GWP growth in Australia down to price increases, which were due to “material rises” in reinsurance and natural hazard costs and economy-wide inflation.

The insurance giant revealed that its underlying insurance trading ratio (ITR) improved to 10.9%, up from 9% thanks to revenue growth, improving expense ratios in the Australian business and an increase in investment yields. Stronger profit is helpful for the Suncorp share price.

Suncorp Bank saw a significant rise of profitability, with the cost-to-income ratio decreasing to 51.8%, down from 59% thanks to both revenue growth and cost management.

Natural hazards were a negative again, with a third consecutive La Nina weather pattern, experienced across the majority of Australia and New Zealand, leading to 15 separate weather events and around 130,000 natural hazard claims. Suncorp exceeded its natural hazard allowance by $97 million.

Suncorp dividend

The payout ratio of 60% of cash earnings is at the bottom of its target payout ratio range of between 60% to 80%.

Suncorp said this reflected its “prudent and disciplined approach to managing capital in the context of the current environment”, the FY24 reinsurance renewal and the process relating to the sale of the bank to ANZ Group Holdings Ltd (ASX: ANZ).

Outlook for the Suncorp share price

Suncorp says its business is more resilient today than it was at the start of its three-year plan in 2020.

The group’s natural hazard allowance for FY24 is $1.36 billion, and it’s tricky for the business that inflation is causing higher reinsurance costs, which Suncorp says is a major contributor to everyone’s insurance costs rising.

Suncorp said it continues to advocate that governments should provide a long-term program to support people living in areas that are prone to floods or bushfires and help make their homes stronger and more resilient, or to relocate to a safer location.

It’s expecting GWP growth of around 10%, with price increases being a big part of that. The company is targeting an ITR of 11% in FY24, though the FY24 first half ITR may be closer to 10%.

In the medium-term, it’s expecting ongoing profit margin improvement thanks to higher renewal premium rates.

However, Suncorp is expecting its bank separation costs to increase from $500 million to between $575 million and $600 million because of the delay in completion.

While profit potential is looking better, I don’t think the Suncorp share price is currently a buy. It has risen 17% over the past year, so it’s more expensive, and I don’t like how often profit is hit by weak investment markets and/or a damaging storm.

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