Suncorp Group Limited (SUN) Earnings Call Transcript & Summary

Good morning. Welcome to the Suncorp market update. I'll now hand over to Suncorp's Group Chief Executive Officer, Steve Johnston. Please go ahead, Steve.

Thanks, and welcome, everyone, this morning at short notice, just to provide an update on the most recent claims activity across the East Coast of Australia that I'm sure you're all familiar with. I'll start by, obviously, as usual, acknowledging the traditional owners of the lands on which we meet and to pay our respects to elders past, present and emerging. Today, I'm joined by a number of members of the executive leadership team. We are widely dispersed today. I'm in Hobart and meeting with the team down here. Paul Smeaton also joins us in Adelaide, meeting with the team there in Adelaide as we look to start the process of reinvigorating our workplaces around the country. And Jeremy and Lisa join us from Sydney. So I'm just going to kick off the presentation, and there was an attached series of slides that I would just make some brief comments to I'll kick off some introductory comments and then hand to Jeremy. He will hand the floor then to Lisa and then we'll sum up and we'll open up for questions after that. And the first slide there on the presentation deck today is the one that we use right up front in all of our presentations that really goes to how we believe value can be created at Suncorp -- that's going to be created at Suncorp. And it's an inverted pyramid and starts with purpose. And our purpose obviously is to build futures and protect what matters. And I think that's never been more amplified as it is when we come to these sort of extraordinary events that we've been dealing with over the past couple of weeks. It's our purpose that defines what's delivered through our people. And what we've found over the past couple of weeks, as we've said into the anomaly of the claims activity, real reinvigoration of our workforce, people wanting to be part of the claims activity, wanting to get in and support customers. And that supports the customers, I think, obviously, is at the core of what we do. But it also makes a point around communities. When you have these big events of the scale of the most recent activities, our work not only builds and get customers back into the homes of residential community, both in terms of getting people back into their homes, rebuilding regions, suburbs, streets, et cetera, et cetera, but also support we provide directly to a number of community organizations that Lisa will talk to. And obviously, doing all of that right in a period of time of great stress in communities and for customers, we believe we can deliver long-term sustainable financial outcome. By doing all that stuff, doing all of that well and creating long-term value, long-term loyalty, brand considerations increases and also high levels of retention. We've already seen that. We saw that 2011, and we expect that we'll continue to see that as we get on top of the claims activity. Assume as quickly, the next slide, which is really the summary of where we're at in terms of the claims outcomes. Quite an extraordinary series of events. As you've seen sort of consecutive days of severe weather that has only recently concluded stretching a geography right from north of -- getting the all way through Sydney, throughout Sydney, I've had the opportunity now to visit Gympie, to visit Lismore. I spent a fair bit of time around Southeast Queensland and I spent time with our assets on the ground in customers' homes as we started the process of that assessment. And obviously, there's a lot of part rates out there in many of these communities with many of our customers who we're working very hard to get back into their homes as quickly as we can. And the enormity of that challenge starts with cleaning up, getting carpets out, getting that taken away by [ Gympie's ] and other authorities and then allowing us to get in and start the process of the rebuild. We talked there about some of the key loss causes, top event loss causes. An interesting event so far has got a whole range of different claims configuration. So a lot of heavy rain, that meant a lot of water coming through roof, gypsum walls, either ceiling cavities, et cetera, et cetera, as you would see in a traditional rain event. Flash flooding, where stillwater is backed up, et cetera, and created flash flooding events across streets and through into individual properties. And then right down into larger -- lot of large claims activity from big losses from riverine flooding and the like. The whole series of different loss causes have been working their way through the event. We seen 34,000 -- it's over 34,000 actual claims to date. We project that will land around 44,000 -- to 44,000 and bringing our total claims -- our natural event claims for the year to ahead of 100,000. We've also talked there about some of the most impacted postcodes. I think they're pretty reasonably familiar with to everyone. Obviously, big activity around Lismore in the Northern New South Wales region and through Southeast Queensland. So that's a quick summary of the claims loss to date. And what I might do now is just hand over to Jeremy to run through the financial implications, but particularly the reinsurance implications, which applied from the event. Over to you, Jeremy.

All right. Thanks, Steve, and also welcome everyone to the call. As Steve's said, let's make a few comments on the financial impacts of the recent weather events. And as Steve said, the weather impacted the cost for 15 consecutive days through late February, early March. And we worked with Weatherzone to determine the number of events from a financial reinsurance perspective. We have assessed that there were 4 separate weather systems, giving rise to 4 separate events. First, we had the East Coast flooding in Southeast Queensland and Northern New South Wales from the 23rd of February to the 1st of March. This was the most significant event across the 4 with approximately 25,000 claims to date. Then we had the New South Wales East Coast low, which included Western Sydney from the 2nd to 4th of March with over 2,000 claims to date. We had smaller events with Queensland storms across the Southeast of Queensland, also from the 2nd to the 4th of March with approximately 1,000 claims to date. And then finally, we have the March storms and flooding predominantly across Greater Sydney but elsewhere as well, which is also a significant event from the 5th to the 9th of March with just under 6,000 claims to date. In terms of reinsurance, these events have impacted across the full breadth of our program across the Queensland home quota share arrangement, the main cat program, drop-downs and the original AXL cover. And after all of that, we expect the net retained cost of these 4 events to be approximately $75 million. I'll now give a bit of a sense of the reinsurance cover remaining following these events. We've got approximately $150 million of the original AXL $400 million cover remaining. We also retained the full limit of the additional 50% -- additional $150 million AXL cover in the first half. We have around $300 million remaining under the 3 drop-down covers with amounts remaining under each of those drop-downs. We have 3 full layers of the $250 million, excess $250 million main cat program. And then we have 2 full layers of the main cat program, $500 million all the way up to $6.5 billion. And of course, the 30% quota share on our Queensland home portfolio remains in place. Now I do note that the events are continuing to develop. And so these estimates may be adjusted as the ultimate costs of each events are more clearly defined. The remaining protection I've just gone through though does reflect a reinstatement purchase of one $500 million excess $500 million lower in the main cat following that East Coast flooding in late February, the first event. The premium is not expected to be material but it does adjust depending on our utilization of that first half for the remainder of the year. Including these events, we've now experienced an additional $10 million since the end of the first half, bringing the total number to $30 million year-to-date. Now as we set our natural hazard allowance on a through-the-cycle basis, ahead of BOM declaring any particular weather pattern for the season ahead, this year's allowance was not set to cover the La Nina weather cycle that was declared in November. And the second consecutive La Nina weather cycle is expected to bring with it more moisture-related events. And given these events, the recent ones, and reflecting the extensive reinsurance cat remaining in place, we now expect the full year national hazard across FY '22 to increase to approximately $1.1 billion. I'd note that our natural hazard allowance has been increased significantly over the last 5 years. And we get comfort over its appropriateness, the level we're now at, given the modeled outcome for La Nina weather pattern gives a similar dollar number to where we now expect to land FY '22. The impact of all these events will, of course, be considered as we renewed the reinsurance program for FY '23, and we'll update on this at the full year results once the renewals have been completed. Before I finish, I'll just make a quick comment on the bank where we've received some hardship requests following the floods, but the overall quantum is not material. We don't expect this to have any material impact on the bank's level of credit provisioning and we'll continue to monitor as we go through to the year-end. On that, I'd now like to hand across to Paul to give an update on the operational aspects of the claims.

So thank you, Jeremy, and good morning to everyone. For those on the call, if you recall at previous investor updates, one of the key strategic initiatives within the Insurance Australia business is the best-in-class claims program. And if you recall, this program has 4 streams of work, 3 of which are directly relevant to the natural hazard events at this point. So first of all, we have digital lodgment and tracking. We have market-leading event response, and we have supply chain optimization. And as Steve has indicated, we have received over 34,000 claims across these events, and our current operational forecast suggest around 44,000 claims will be lodged. In terms of our initial response, one-on-one communications with our customers has played a very important role. For example, more than 1.1 million SMS messages have been sent to our customers to provide online lodgment and provide information on the claims process. As a result, we are currently seeing around 68% of claims lodged online, homes sitting around 71% and motor, 51%. Now this has allowed our customers to avoid potential [ call issues ], but more importantly, expedite the recovery process. So to give you a feel for that, more than 11,000 make safe repairs have been allocated and over 600 customers are being placed in temporary accommodation. Further, reinsurance and claims messaging has been deployed across all channels, including social media, radio, TV and press. Now given the scale of these events, a dedicated head of flood response from Recovery Manager has been appointed within the home claims team to oversee the individual recovery process. In terms of personnel, we anticipate approximately 600 FTEs will be required to respond. These teams will be located in both Australia and New Zealand. Recruitment has commenced with 200 appointments underway. And the first round of training started on the 11th of March. Now our key capability within our dedicated natural hazards rec response team is the event control center. Now the event control center uses geospatial technology and satellite imagery to understand impacted areas, it gives us a sense of our risk in force in those impacted areas and those risk in force we have lodged claims. Throughout the event, these insights have allowed us to drive personalized one-on-one communications such as proactive welfare course, it's allowed us to identify locations to deploy our face-to-face customer support teams and has helped inform us in terms of our claims management assessing and repair strategies. Additional data sources from Suncorp flyovers and flood mapping are currently being loaded into the event control center, and this will provide further insight to support our response. Today, as Steve mentioned before, the customer support teams have been deployed to Gympie, Ipswich, Murwillumbah, Mullumbimby and Lismore. And those impacted areas, we obviously aware on home assessors on the ground. For motor, we have established a dedicated triage cycle flood-damaged vehicles in the Greater Brisbane. And we have also set up a dedicated process for customers with motor claims in the Northern business region. We've set an SMS to those who have launched the claim requesting that the customer supply images of their damaged vehicles via e-mail, and this will allow us to progress their claims through a digital assessment process. In terms of our supply chain, Suncorp has a national homebuilding panel consisting of 38 builders. Our contract rates, terms and conditions were renewed as part of the best-in-class plans program in November of last year. However, to ensure our building panels secure and retain trade capacity, unloading has been agreed to the contracted rates. Importantly, this lane will only apply to these events, which, in essence, preserves the cost associated with our working claims book and other events. Given the scale of this event, we've had to work to secure additional billing capacity and have enacted project management capability across the Pacific regions. The allocation of our -- of this work through our billers and cost control will be managed using the recently deployed In4mo and ICBM systems. At this stage, there are no capacity issues that are dedicated commercial property, builder and loss-adjusted panels. For motor, we expect the event will result in the majority of damaged cars being considered a total loss. Therefore, there will be a limited impact in our motor repair panel. The first salvage options for damaged vehicles are scheduled later this week. So in summary, there is no doubt given the scale of these events that will be our challenging recovery process. However, we do feel we are well placed to respond given the capability we have available as a result of the best-in-class claims program work. On that note, I'll hand over to Lisa.

Thank you, Paul, and good morning. I'm going to touch on our brands and pricing. And what I would say is the strategic priorities that we've outlined previously have helped the insurance business be in a strong position to respond. So firstly, as you know, we took on the role of reinvigorating the brand to reinforce the value they provide, and there is no better time in a disaster. As you would also know, Suncorp in recent times have taken on a leadership position to help communities prepare for disasters, which Steve will touch on. We've also strengthened our proposition to help with the recovery with Suncorp having built it back better product feature and GIO safety niche. During the event, we have driven a strong presence in market with price and weather alerts and customer support messaging. Using data and analytics, we've proactively contacted over 2 million customers through SMS and e-mail to provide them with the details on how to lodge an online claim alongside chips to help with the recovery. We also created specific above-the-line marketing for the event with significant reach across the East Coast. Our estimated total cumulative reach over the 17-day period is 52 million. To support a community-led recovery, we have also pledged $1 million as part of our community support package. This includes $0.5 million of flood-related grants in local communities across Queensland and New South Wales in partnership with our existing partner, the Foundation for Rural and Regional Renewal. This event is across a broad geography and these grants will be available as each region will have different concerns and needs. Whilst it's early days, but since the event, we have seen a lift in sales and strong retention continue in part reflective of the flight to quality brands and those brands were visible and responding during crisis. Now let me touch on pricing and risk selection. So we continue to make good progress in this strategic pillar. Responding to the increasing frequency of natural hazards and reinsurance costs, we commenced significant repricing of the home portfolio in mid-2020, where we've been putting through significant increases around double-digits. We have also strengthened our pricing tools and models to better understand peril risk and price for it. Importantly, CaPE has now been deployed for mass home. While it's still early days, CaPE is delivering in line with expectations with January seeing our mass brands with record home renewal rates and average premiums for each brand. When we deployed CaPE, we also updated our natural hazard models with even better risk selection. However, we have a large event, we also reflect on our models relative to the experience. And based on our modeling to date, our risk in force is lower in high flood areas relative to our market share. And whilst we know claims are still yet to be lodged, the map we have on the slide is for Lismore. The blue dots represent our view of low-risk locations, with higher risk progressively moving through amber and red. And the blue shading represents where the flood has affected parts of the town. As more detail emerges from the event, we will continue to check our model accuracy. And we take now towards the home, we are better positioned to update models and pricing posting events such as this. And as we continue, we will continue to ensure we have disciplined portfolio management alongside continuing to strengthen the underwriting and pricing tools across the consumer and commercial portfolio in particular. I will now hand back to Steve.

Thanks, Lisa. And before we hand over to questions, I just want to restate some of the resilience and mitigation messaging that we've applied in the market. And it's not -- we're not new to this story, as you know. I think I've been talking about it. We've been talking about it as a company for a number of years and particularly amplified post the bush fires in our half year results in 2020. Really, we do need the series of these issues, and we've been saying this for a number of years, 4-point plan that we've talked about is a simple way of thinking about how the public policy response should be galvanized alongside the work that the individual insurers do and that the insurance council as a collective does alongside government at all levels. The first point of that plan is to improve public infrastructure. We know that levies and other elements of public investment do mitigate against risk and they do mitigate against flood risk. And we've seen that in many communities, particularly in Roma in Southwestern Queensland. And we know that those investments work. We know that there's a number of levy proposals that are sitting on the shelf, locked up at the moment between local state and federal government, and they can be moved very quickly into implementation phase. The second point is to provide subsidies to improve the resilience of individuals own health assets. Lisa talked about the way that we've applied our product innovation capabilities to build it back better through our One Health initiative. It seems unusual for me that you can get a subsidy to put a solar panel on your roof, but it's very difficult to get a subsidy to batten down your roof to offset against the category 4 or 5 typhoons. Our priorities here are all wrong. So there's a great opportunity for subsidies, whether that be tax subsidies or otherwise to encourage people and to incentivize people to improve the resilience of their private dwellings. In those first 2 points, I'd make the point that the ICA has recently produced a manifesto, ahead of the federal election campaign, which outlines a $2 billion investment, which stretches across both those 2 categories, improved public infrastructure but also a series of initiatives to improve resilience of private dwellings, $2 billion for a $19 billion return through 2050. It seems to be a reasonable investment at the moment and that we believe [ its full ] part of the IPO. And the third point is obviously inadequate planning laws and approval processes. Now this is an issue that stretched back for more than 100 years. So it's no point, I'm not pointing fingers in any particular level of government already recent government has been in place for a long period of time. It's time we drew the line, we improved the quality of our planning and development laws, and we look to create planning laws that are more appropriate for the risk that we face today with the risk we might have faced 50 to 100 years ago. And the final point is one that we are very passionate about, which is the removal of inefficient taxes and charges from insurance premiums. The fact is that the New South Wales today, more than 40% of the insurance premium is taken up with both the GST and the same duty emergency services levy sitting on top of it. It's 30% in Queensland, 30% here in Tasmania as well. It seems to be the most inefficient utilization of taxes and charges and leads to -- and compounds affordability issues. There's a high correlation between lower socioeconomic communities and flooding particularly. And so those premiums in those insurance policies delayed with apparel leading for [ flooding ] and other payroll-based activities. And on top of that proportionate is the GST and the same duty. It just seems to be a huge incentive for people to take home insurance cover at a period of time when they really do need home insurance cover. So again, we reiterate that the 4-point plan is a very simple way of thinking about how the public policy response may well work alongside the work that we have to do with the insurance companies, get people back into their homes and the work that the insurance industry more broadly needs to do to create more in Australia. So at that point, I might forward and open it up for your questions.

[Operator Instructions] Your first question comes from Kieren Chidgey from Jarden.

I've got a couple of questions, if I can. Maybe just starting on the event definitions, Jeremy. I just wanted to be clear around the 4 events you're talking to. Is that partly a function of sort of the flood period cover under your reinsurance? Or do you see them as 4 separate weather events?

Yes, Kieren, it is predominantly a function of the different weather events. So on the first one, there is a little bit of -- with our event cover time period, there's a little bit of a latitude around a day really the rest of them and that's truly dependent on whether or not they defined as different weather systems. And they have been defined as different water systems in which case they are different events from a reinsurance perspective.

Okay. And secondly, just in terms of the revised budget, can you give us a sort of fairly high-level feeling for what you're assuming for the remainder of the half in terms of what's going into that for any further large losses?

Yes. I mean, look, we do a number of different scenarios on it, Kieren, come to another different ways. But the first way we come at it is look at the -- we run it through the model. We run where we are actually year-to-date through the model. We turned the landing adjustment on the model, and we see what number that gives us. We'll then look at the -- in the appendix here, you've got effectively the year-to-date natural hazard cost of $950,000-odd. So that leaves another $150 million to go to the $1.1 billion number. And we think about that in terms of what that needs to cover, which is attritional losses and deductibles on the -- particularly at the AXL for any events coming through there. And then we'll also have a look at it in terms of large losses. So we come to it in a number of different ways. And this is why we come to the $1.1 billion is the expected loss for the full year. In fact, it's a little bit -- it's just marginally less than $1.1 billion, it's not quite $1.1 billion, but we rounded up to $1.1 billion.

Okay. And just a final question. I'm just interested in sort of what you said is sort of implications as you go into the reinsurance renewal of 30th of June, both in terms of the structure of your current program, the availability of sort of the aggregate in particular and potential sort of repricing impacts as a result of what looks like it will be quite significant utilization of how are they securing?

Yes. Look, I mean it's too early to talk about renewal implications outcomes. That's commercially sensitive, so not something we could talk about anyway. But clearly, there's been a lot of weather. Clearly, there will have been a lot of recoveries against the program. And for us, we'll continue with the same strategy that we've always had with reinsurance, which is around optimizing ROE through the program, particularly through the main cat layers and then seeking to optimize the volatility cover. So we'll maintain a similar strategic approach to it. And we're going to go through the renewal cycle. And there's probably not much more that we can say at this stage, Kieren because actually, we don't know either.

Your next question comes from Andrew Buncombe from Macquarie.

Just the first one is off the back of one of the previous questions. So just the $1.1 billion hazards guidance, I assume that you go through all of the additional $150 million AXL or whether that sits against the $1.1 billion?

Well, potential why you commented, Andrew. So from a model perspective, that the modeled outcome is actually we don't go all the way through it. So that's one way of looking at it. But equally, from a sort of a bottom up that $150 million still to go. With the scenarios around that, we assume that we are close to getting to the top of it.

Yes. And then my second question was just on the cost of the reinstatements. Historically, they cost you about $25 million to $35 million. Is that the right way to think about it going forward? Or is it so flexible right now that it's difficult to comment?

Look, I mean, obviously, it's sensitive -- commercially sensitive number, but we're saying it's immaterial. So I expect to be less than that. But as I said, there is a contingency around it in terms of how much of that first layer -- but not how much of it, but if we use that first layer and it becomes sort of [ lower ] then there is continuous. So the way we look at it really is, it's sort of like an option price to take that third layer out.

Sure. And then the final question for me was around Paul's comments about hiring an additional 600 people to deal with the claims. How should we be thinking about the cost of those people against the group cost targets of '23? Or are they all going through the claims line and into reinsurance?

Yes, they will all be recovered through the reinsurance line. So that should have no impact on the '23 targets.

The next question comes from Nigel Pittaway from Citi.

I mean just first of all, following up on the reinsurance question. I know you can't sort of talk about the cost of that per se, but maybe you could give us a flavor for how much of these events have hit the main cat tail rather than the volatility covers. So have the sort of reinsurers on the main cat taken a fair sort of bar from this? Or is the main sort of cost still going with the volatility cover providers?

So the -- we've said that we've got 3 of those, the 250 excess, 250 towers left. So they can infer from that, that one of the events has gone through the 250 layer, 250 [ again 100 ]. And then we've reinstated the 500 to 500 layer, so you can infer that one of the events has gone through that as well. We're not talking to state about how much though that it is. But yes, we've gone through -- one of those events has gone through the -- all the way through to a 500, 500 layer. The rest of them are sitting down in the volatility covers.

Okay. So when it comes to renewal, you're still going to expect a lot more pressure on the volatility covers than you are on the main cat program, is that a reasonable conclusion?