Doubt cast over Suncorp chief’s ambition to lift trading ratio

Suncorp CEO Michael Cameron’s goal to steer the insurer to a 12 per cent trading ratio has been met with doubt.

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Suncorp chief executive Michael Cameron’s goal to steer the insurer back to a 12 per cent trading ratio has been met with doubt by analysts, who believe the company will sacrifice market share in the wake of planned premium hikes.

Suncorp shares faced selling pressure again yesterday, following Monday’s 10 per cent dive after it warned the market its insurance trading ratio — a key measure of profitability — was going to fall to 10 per cent for the first half of the year, down from 14.7 per cent at the end of last financial year.

Goldman Sachs analyst Ryan Fisher said he was accustomed to seeing large and sudden swings in the headline margin, but “it is difficult to reconcile how the underlying margin has changed so significantly in such a short period of time”.

Mr Cameron, who took control of Australia’s second-largest insurer in October, blamed expensive repair parts, inflated by a series of wild weather events on the east coast and a weak Australian dollar, poorer returns on investments and increased NSW greenslip claims for the downgrade.

Analysts were sceptical the problems were industry wide, counter to the predictions of Suncorp executives, and doubted whether Mr Cameron’s premium hikes would deliver.

Morgan Stanley analyst Daniel Toohey said price increases would come at the expense of volumes, which were “critical” for Suncorp’s personal insurance business.

If Suncorp’s headwinds were industry-wide, Mr Toohey said, a market-wide pricing response would allow the company “to benefit from the rising tide”, but if isolated to Suncorp, then fixing the issues were “more complicated”.

Macquarie said a pricing drive would come against a “very competitive” industry environment. All companies are seeing either flat or modest premium growth, Macquarie said, with the exception of online-based disrupters such as Youi, which grew 35 per cent last year.

UBS analyst James Coghill said it was surprising to see problems in the internal claims processes, the streamlining of which was a core pillar of previous boss Patrick Snowball’s narrative.

Deutsche analyst Kieren Chigdey also rounded on the new boss, Mr Cameron was waving goodbye to his salad days, and the plan to restore the trading ratio to 12 per cent through the cycle was “a stretch” in the current competitive landscape, he said.

Mr Chigdey forecast the ratio clawing back as only high as 11.4 per cent by the end of 2018.

Credit Suisse analyst Andrew Adams said he lacked confidence in Suncorp’s earnings trajectory. New management had shown no hesitation in distancing itself from the previous executive team, were “not extremely clear” on the downgrade, and “didn’t outline a plan to address the margin deterioration”.

“Hence we lack confidence in the earnings trajectory in the near term,” Mr Adams said.

But Mr Coghill said there were reasons to be more positive on the second half of the financial year, given the repricing in motor and home insurance and the ramp-up of the optimisation program, which is expected to deliver benefits in the order of $170 million by 2018. Suncorp shares closed down 44c at $11.33.