Don’t use insurance as a tax dumping ground: Suncorp

Suncorp CEO says the insurance sector is a “dumping ground” for inefficient taxes, and urges governments to use COVID-19 stimulus to better prepare for natural disasters.

Steve Johnston, Suncorp CEO, hands down full-year profits on Friday. Picture: John Feder

Suncorp chief Steve Johnston says the insurance sector is a “dumping ground” for inefficient taxes, and is urging governments to reform taxes and use COVID-19 stimulus to better prepare the nation’s infrastructure for extreme bushfires and other natural disasters.

Mr Johnston, who handed down the insurance and banking group’s annual profit on Friday, said given the intense focus on the pandemic Australia shouldn’t lose sight of long-term climate change issues, that were spurring more intense and frequent wild weather events.

“Arguably our nation is no better placed heading into this summer than we were this time last year,” he said.

“We shouldn’t kid ourselves that the underlying problems that were so painfully brought to the surface last summer have gone away, nor that they won’t re-emerge this summer.”

With federal and state governments already looking at large-scale further stimulus to help the economy recover from its first recession in almost three decades, Mr Johnston highlighted an opportunity to direct spending to infrastructure and disaster prevention.

“They will need to stimulate the economy, they will need to invest, why not line it up with a nation-building resilience program (that is) multi-year?” he said.

The Suncorp chief’s comments came as Reserve Bank governor Philip Lowe addressed National Cabinet and called on state and territories to boost public spending by 2 per cent of gross domestic product to aid an economic recovery.

Mr Johnston is also of the view that taxes and levies that are built into insurance premiums are contributing to affordability issues and needed to be reviewed, as tax payers often footed the bill when disasters struck and parts of the community were uninsured.

Suncorp expects “long lasting” COVID-19 economic disruption, and on Friday reported a 33 per cent drop in full-year cash earnings as extreme weather events and the pandemic hit income and boosted expected loan losses.

Cash profit fell to $749m for the 12 months ended June 30, from $1.12bn in the year earlier period.

Annual statutory profit jumped to $913m from $175m in the prior financial year, as Suncorp booked $285m proceeds from the sale of its Capital SMART and ACM Parts businesses, and a $89m non-cash impairment relating to the core banking platform.

Suncorp — whose brands include AAMI, GIO and Apia — declared a final dividend of 10c per share, taking the year’s payments to 36c and reflecting a 48.6 per cent slump on 2019. COVID-19 has triggered a focus on capital conservation.

But investors applauded the dividend and better-than-expected earnings result, with Suncorp’s stock surging 11 per cent to $9.65 on Friday, marking the biggest one-day gain in five months. Some financial services companies, including Insurance Australia Group and Westpac, have scrapped their respective final and interim dividends against the backdrop of COVID-19.

Shaw and Partners analyst Brett Le Mesurier said Suncorp had posted a “strong performance” in difficult circumstances.

“The large improvement in the insurance margin was due to margin expansion across New Zealand, consumer, commercial and workers’ compensation,” he added.

The results noted premium rises across motor, home and commercial insurance lines.

S&P Global Ratings said Suncorp’s defensive actions and conservative balance sheet had “subdued the effects of heightened natural hazard claims, material market volatility, and strengthened provisions”.

Suncorp didn’t provide earnings guidance but committed to its dividend payout ratio policy of 60-80 per cent of cash earnings.

The base case economic assumptions the company is drawing on point to a sharp deterioration in macroeconomic conditions before the economy begins a recovery from 2021.

The group’s natural hazard costs remained in line with the year’s allowance of $820m, following a period marred by bushfires and other weather events. But Suncorp raised its natural hazard allowance for this financial year by $130m to $950m, in anticipation of another challenging year of natural hazards.

As well as its main program, the group purchased aggregate excess of loss reinsurance cover, providing $400m of cover for events in excess of $5m.

As COVID-19 continues to cause havoc across the business community, Suncorp is also part of the Insurance Council of Australia and the Australian Financial Complaints Authority’s test court case over the application of infectious diseases cover in business interruption policies.

Mr Johnston said Suncorp was “confident in the intent and wording” of its policies excluding pandemics for claims under business interruption policies.

Overall, across the insurance, banking and New Zealand divisions, COVID-19 dented pre-tax earnings by $140m.

Suncorp’s insurance Australia unit saw annual profit slump 33.9 per cent, while the banking division had a 33.5 per cent decline and New Zealand’s profit printed steady at $245m.

Suncorp’s Australian insurance unit recognised $85m in additional claims provisions and risk margins for COVID-19, including landlord loss and potential business interruption claims.

The results also showed a $25m provision for molestation claims, some of which related to legislative change following the royal commission into child sexual abuse.

The group’s underlying insurance trading ratio printed at 11.1 per cent, down from 12.3 per cent in the prior corresponding period, weighed on by the natural hazard allowance, reinsurance costs, higher expenses and lower investment income despite an annual return of 2.1 per cent.

The amount the bank set aside for loan losses increased to $255m at June 30, compared to $233m three months earlier. As at July 31, 5 per cent of Brisbane-based Suncorp’s home lending portfolio reflected borrowers on loan repayment pauses, down from 8 per cent a month earlier. The banking division saw its net interest margin increase, as Suncorp benefited from higher deposits.

The group reported excess common equity tier one capital of $823m.

Operating expenses increased 2.3 per cent, as Suncorp booked a $60m provision for an ongoing pay and leave entitlement review and higher technology costs.