Stocks In Focus: Suncorp, September 10 2025

0:01A listener production.

0:10G'day and welcome to Motley Fool Stocks in Focus. I'm Scott Phillips, the Motley Fool's Chief Investment Officer here in Australia. Thank you for joining us on either our YouTube channel or on the Motley Fool Money podcast feed. As you probably know by now, this episode goes in both places. Except I have to apologise to this bloke, Benny O. So first I'll say g'day, Benny. G'day, Scott. How are you doing today? Mate, I'm well. I made a mistake when I was doing our ANZ one. So I say it's in both places and it should be. You do want an ANZ. So if you're watching this on YouTube, the ANZ video is not on YouTube because I screwed up when I was recording it.

0:42We only recorded the audio. So if you want the ANZ, here's a good reason to go and subscribe to the Motley Fool Money podcast. Go back in the feed. You can find Benny's on ANZ. I think, what, three or four weeks ago, mate, I think it was. Is that about right? Yeah, I think it was very recent. All right, so there you go. Extra bonus one if you're on YouTube. Back back and have a look on the podcast feed. you'll find the ANZ episode that Benny went through. He did a really good job, by the way, so I apologise, Benny, for not having that done. That was completely my mistake. We're going to try and get some sort of placeholder on YouTube.

1:10It didn't happen, so there you go. Let's dig in to Stocks in Focus. A reminder if you're new to the channel, firstly, we only give general advice, not personal advice. The difference is kind of legally kind of different, but frankly, all we're saying is we tell you what we think about a company. We can't tell you whether it's right for you. You have to decide. Secondly, Stocks in Focus is not a formal recommendation of the Multifull. I will ask Benny for his thoughts at the end as to whether or not he thinks it can beat the market, but it's not a formal recommendation. Lastly, we're recording this one middle-ish of September, early mid-September.

1:40We may well, circumstances will change. Benny may or may not change his mind. Whenever you're watching this, just be mindful. It was recorded at some point, days, weeks, months or even years earlier than you're watching or listening to this one, so just keep that in mind as well. All right, mate, that's enough boilerplate disclaimer. It's important, but we have to go through it. Let's get into the company. This time we're talking about Suncorp. And you mentioned to me before we started recording, you went through ANZ and you looked into the Suncorp bank side and you thought, you know what, let's do Suncorp.

2:05And I think that's a really, really smart idea because Suncorp's one of those businesses that, you know, they kind of get together to break apart, get together to break apart. That's been the Suncorp story. So rather than me do it, tell us about the business that is now the business we know as Suncorp. So I think you just mentioned it briefly. Suncorp recently sold its banking business to ANZ. I think it was last year, July. And at the start of this year in January, they sold the New Zealand life insurance. So it's now become a pure play general insurer. And it's one of the largest insurers in Australia, New Zealand.

2:39And they're very focused on general insurance now across home insurance, motor insurance, commercial insurance. I think there's one called CTP, which is compulsory third party. I think you guys in New South Wales call it Greenslip, I think, from the old days. Correct. Well done. Yep. But he owns a lot of well-known brands like Amy, GIO, APIA, Shannon's. So he's got a really strong consumer and strong medium, I think a small medium business franchise kind of reach. And so I think overall right now, they've got around 9 million customers. So quite a large footprint, but it is headquarters in Brisbane.

3:18So the footprint is largely in Queensland. I think it makes up around a quarter of its gross premiums are in Queensland in Australia. So quite a big footprint there. But after selling down the banking business arm, it's now more focused, like I said, on insurance operations. But it's able to make more investments in technology. And I'll talk to that bit in terms of the digital offering they're providing. But I think alongside underwriting policies, they earn income from the investment portfolio as well. and over the past few years with the rate hikes, it's actually benefited from the high interest rates.

3:53Very nice. So a general insurer these days, not the Suncorp, maybe you think, you know, if you've seen the brand around on bank branches, it's not owned by Suncorp anymore, it's owned by ANZ. Let's talk about the investment case for Suncorp, the insurer, mate. We'll talk about the pros and the cons. Again, we're not saying people that shouldn't necessarily buy these shares, but if they were going to, if you wanted to sort of highlight, hey, here's what you should consider at least, here's what you should know about Suncorp that's positive from an investment angle in particular, as I say, What would you tell people, mate?

4:18My first point was probably a point towards Suncorp having an improvement in their underlying insurance margins. So after several years of significant premium increases, I think a lot of people would be feeling the crunch. The home insurance have gone up. The motor insurance have gone up. But also the bank has generated a lot of investment income, like I mentioned, from the elevated interest rates. Its core insurance profits have actually remained quite solid. And this is starting to show up in its latest financial numbers. In FY25, the underlying margins reached around 12%. Just some context, the prior year was around 11%, and five years ago it was 7%.

4:59So you're seeing that kind of steady improvement in the underlying margins. And management expects margins to hold in at that 10 % to 12 % range, which is still in the double digits, but it clearly shows that it's improving over time. The second point I'll probably point to is that Suncook provides shareholder-friendly capital returns. Dividends, they've been rising steadily since FY22. And I think that's a reflection of a stronger business, but also good capital management. It's paying around 4.5 % dividend yield at the moment, given the latest payout. I think it was like 90 cents per share. But on top of dividends, management has actually launched this month a$400 million on-market share buyback.

5:45So I think that kind of highlights management is committed to returning any surplus capital back to investors. The last point, I think this talks to the Suncorp being more focused and more simplified business. It's really strengthened its kind of buffers against those natural disasters that we've seen, Cyclone Alfred in particular. and they've set aside really conservative allowances for this. I think last year in FY25, they had 17 weather events and I think they had around 120 ,000 natural hazard claims. But despite all that, the cost still came below the allowances they provided for these catastrophes, which is a really good sign.

6:23And like I mentioned before, the business is making a lot of investments in driving productivity gains, efficiencies. They're doing that through digital offerings, but also AI. I think, for instance, Suncorp said AI was used to process 7 ,000 claims from the cyclone Alfred in Queensland earlier this year. We're going to hear more about that in the coming months and years ahead. My AI is everywhere and it's really business of usual. They're doing fantastic work with it. I know that that's a fascinating stat. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

7:00So that's the pro side. That's the positives. Let's talk about the negatives. Before people jump out and go and jump their brokerage site and buy some shares in Suncorp, well, should they just be at least a bit aware of or maybe what might make them take a bit of a pause? I think when I was talking about the pros, the first thing that many viewers might be thinking about is extreme weather events. I think that's a key thing to watch out for because Suncorp's heavily exposed to natural disasters. I think floods, bushfires, storms and cyclones, any single bad season can really drive up claims and I think that can really impact its profits.

7:36I personally think that climate change raises that risk of more frequency, more severe kind of weather events. So I think Suncorp sees the same picture because it's upped its catastrophe losses in the last year just to reflect that higher risk. And while they've had a benefit from lower reinsurance costs and it can provide some protection, costs can spike up again, especially if we incur another natural disaster or some kind of major week-to-end weather event. So it can be expensive. It can end to margins. I think that creates that ongoing uncertainty in earnings. The second point, probably point two, is the competitive pressures.

8:16The general insurance industry, it's highly competitive, and you've got ongoing competition from rivals like IAG, QBE Insurance. I think that really means that Suncorp may need to – they might be forced to cut margins just to win or retain customers. So it's a really, really highly competitive environment. But not only that, the insurance industry, it's a low growth, mature industry. So I mentioned about those premium increases, and it's been a tailwind in the last several years for insurers and Suncorp. But that's kind of moderating. And so we're kind of seeing that happening. And investment income is likely to soften because there's a potential for interest rates to fall.

8:56So you've seen that kind of headwind at the top line. And as we all know, the insurance industry, it's actually tightly regulated. So any government intervention, that can really cap pricing or add any compliance costs. So I think future revenue and future returns, they're likely to depend more on costs, better cost control and better capital returns and not really on any meaningful revenue growth. And that makes things a bit difficult when it comes to the valuation, Benny. So thank you for running through the pros and the cons. I am going to put you on the spot here. Again, not a formal recommendation.

9:30It's not a recommendation of ours here at The Motley Fool. But I will ask you, what do you reckon? We're long-term investors. Over the next five or so years, do you reckon Suncorp's likely to beat the market or maybe lag the ASX? So when I was researching into this, I think Suncorp seems like reliable for income-style returns. But over the long term, I think it's unlikely to be a market beat-off. I mentioned those key points about insurance being a mature, low-growth industry. Those premium increases, they're moderating. I think that's already been baked in from the stronger earnings they had in the most recent results.

10:04You've got competition rising. You've got inflation easing. So I think there's less room to lift prices over time. You've got the extreme weather risks that remain and the cost of protection from reinsurance. That can change year after year. So that's going to squeeze margins. So the bulk of returns, it's likely to come from dividend yield. I think it was recently paid out 4.5%. But capital growth, I think that's quite limited. So I think overall, particularly at today's foolish road valuation, I don't think it's going to beat the market over the long term. There you go. You heard it first from Benny directly.

10:37Suncorp, maybe not likely to be a market leader, but maybe interesting if you are looking for income from your investment portfolio. Hey, before you go, do me a favour. If you're on the YouTube channel, please like and subscribe. I know everyone says that, but liking means other people see it. Subscribing means you can basically see what we'll do next. Most importantly, if you are going to subscribe, hit that notification bell so that they can send you an alert, YouTube that is. We'll send you an alert when we publish new stuff. Stocks in Focus every week, Stock of the Month. Recently just out, by the way.

11:02Check that one out. What I've been reading, Motley Fool TV, lots of good stuff on the YouTube channel regularly. Do that. And by the way, as I mentioned, if you jumped over to the Motley Fool Money podcast, listen to the ANZ one, please subscribe when you're over there as well because we do three episodes a week, one of these and two other episodes. So lots of good free, by the way, stuff from The Motley Fool on those two channels. Thanks for watching. Thanks for listening, Benny. Thanks for sharing your expertise. And until next time, Fool on. The Motley Fool and people appearing in this program may have positions in the companies mentioned.

11:31General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.