Suncorp Transitions to Pure-Play Insurer with Significant Capital Return.

About Suncorp Group Limited

Suncorp Group Limited, (Suncorp, the Group, ASX: SUN) is an insurance company that offers home, contents, and car insurance, and owns the brands AAMI, GIO, Shannons and Vero. On 31 July 2024, Suncorp announced the finalisation of the sale of Suncorp Bank to ANZ, making it a pure-play insurer.

Capital return and special dividend to be paid in March 2025

Suncorp intends to return proceeds to shareholders from the recently completed sale of Suncorp Bank to ANZ Bank. The proceeds are estimated at $4.1 billion and comprise two components: payment of a special dividend and a cash payment for shares that will be subsequently cancelled after being paid out.

The special dividend amount hasn’t been determined and the cash payment for shares will form most of the proceeds to be returned. Shareholders can reasonably anticipate a 90 percent – 10 percent split between the amount of the capital return and the amount of the special dividend. The special dividend will be fully franked. The payment of the special dividend and return of capital is likely to be paid around early March 2025. A high-level analysis indicates that shareholders can expect approximately $2.90 per share capital return and a 30 cents per share fully franked special dividend.

The capital return amount is not taxed as income because it represents the return of the shareholders’ own money. In other words, a payment made to oneself is not taxable income. It is however a reduction in the cost base of Suncorp shares held by the shareholder and so the capital return results in a higher capital gain when the shares are sold. The advantage is that the tax liability, if any, is deferred until the shares are sold.

Proposed Share Consolidation

The return on share capital ultimately reduces Suncorp’s shareholder’s equity, and so a proportionate reduction in Suncorp’s share price by the approximate amount of the capital return is likely to occur following the return. So, payment of the planned capital return will see the Suncorp share price decrease by about $2.90. To counter this anticipated share price decline following the return of capital, Suncorp intends to consolidate the remaining ordinary shares on the issue into a lesser number of ordinary shares in the Group.

The purpose of this initiative is to neutralise the reduction in share price by proportionately reducing the number of ordinary shares using a Share Consolidation Ratio. The Share Consolidation applies equally to all shareholders so that each shareholding still represents the same percentage of issued capital held prior to the Share Consolidation. This means that shareholders will own a lesser number of shares, but the share value will be proportionately higher because it will reflect the same value of existing assets, but these assets will be shared among a lesser number of shares.

Suncorp is now a pure-play property and casualty insurer

In addition to the Suncorp Bank sale, Suncorp has sold its New Zealand Life Insurance business, which is expected to be completed around the end of January 2025. The estimated net proceeds from the sale of the New Zealand Life business are about $270 million. This sale may supplement the special franked dividend to accompany the capital return funded by the proceeds of the Suncorp Bank divestment.

Dismantling Suncorp’s conglomerate financial services model has been overhanging the Group’s valuation since at least the Global Financial Crisis. The Suncorp chairman tacitly acknowledged this recently by stating that the divestment of Suncorp Bank was assessed through the lens of creating value for Suncorp shareholders. The rationale of this observation is that investors apply different valuation methodologies and discount rates to an insurer and a banking institution because the nature and risks of each type of business are different and operating synergies, if any, are minimal.

Now that Suncorp is exclusively focused on insurance, the Group plans to invest significantly in platform modernisation and Artificial intelligence-enabled operational transformation over the next three years. The application of Artificial Intelligence is well suited to areas such as risk pricing and modelling, claims and customer service. This planned technology upgrade and process improvement should drive down operating costs and streamline customer service.

Suncorp is now a far simpler and easier-to-understand pure-play trans-Tasman general insurance company that is well-capitalised with strong market positions and ambitious plans to grow market share within clear financial parameters. This strength combined with a target dividend payout range of 60 to 80 percent should sustain earnings and dividend growth well into the future.