Suncorp’s profits at risk, natural hazard costs and reinsurance expenses soar: Fitch Ratings

A modest decline in Suncorp's underwriting profitability is seen over the next 12 to 24 months.

Suncorp Group faces exposure to natural perils as a major home and motor insurer. Although profitability is supported by a robust reinsurance program, the higher frequency and severity of extreme weather events, along with rising reinsurance costs, have led to an increased natural hazard allowance, according to Fitch Ratings. 

Changes to the reinsurance program, especially higher net retention amid rising costs, could potentially impact Suncorp's profitability and capitalization.

Expectations include a modest decline in Suncorp's underwriting profitability over the next 12 to 24 months due to higher natural hazard costs and increased reinsurance expenses, offsetting strong premium rate increases. 

Suncorp's combined ratio deteriorated in FY23, reflecting higher claims ratios and increased natural hazard costs and reinsurance expenses.

On a positive note, Suncorp's net profit after tax increased in FY23, driven by a turnaround in investment income with higher reinvestment yields and strong performance across all divisions. 

ALSO READ: Suncorp sells banking arm to focus on insurance

The successful sale of the bank will allow Suncorp to focus on its core non-life insurance operation.

Suncorp's company profile is deemed 'favourable,' supported by a 'moderate/favourable' corporate governance rating compared to other Australian insurers. 

It is the second-largest non-life insurer in Australia and New Zealand, with a portfolio of established brands.

The sale of the bank will enable Suncorp to concentrate on its core non-life insurance business. 

Despite representing 71% of Suncorp's consolidated assets at FY23, the bank's contribution to net profit after tax from group functions was 35%, with the majority coming from Suncorp's insurance operation.

Financially, Suncorp maintains low financial leverage, with the financial leverage ratio at 13% at FY23.