Is Suncorp Life worth $2.1bn

  • By Elizabeth Fry

Shareholders in Suncorp Group are keeping their fingers crossed that the Queensland insurance giant will sell its Australian life insurance business for a good price, amidst dramtically wide differences in valuations.

Suncorp’s move to sell the Australian life insurance division follows the sale of Commonwealth Bank's life insurance business to AIA Group for $3.8 billion.

This price tag represents a 10 per cent premium to the business’s embedded value of $3.53 billion.

In essence, embedded value is the future value of the business currently on an insurer’s books.

Suncorp’s life insurance business has an embedded value of $1.96 billion suggesting some good news ahead if Suncorp can strike a similar deal to CBA, according to Credit Suisse analyst Andrew Adams.

Since CBA sold its life unit on a multiple of 1.08 times embedded value, then it stands to reason that Suncorp could reasonably expect to seal a deal for $2.1 billion.

Not all EVs are created equal

But Adams has warned against assuming that all embedded values are created equal.
 

In a client note, the analyst used different ratios to calculate a potential sale price for Suncorp’s life division - using CBA multiples - and this revealed some stark differences between the size and the profitability of the two portfolios.


While CBA announced the sale at a 10 per cent premium to its embedded value, this was based on a price-to-earnings multiple of 11.69.  

By applying the same multiple to Suncorp’s life business, the value is $1.08 billion - almost half that of CommInsure and Sovereign which have a higher quality book.

But when looking at the CommInsure and Sovereign sale price based on inforce premiums, the price tag is higher.
 

"We note that the CBA sale price as a percentage of inforce premium implies a15 per cent discount to Suncorp’s embedded value which is closer to the range of where we think a sale could get to for Suncorp,” Adams noted.

CBA-owned Commisure and Sovereign had inforce premiums of $2.37 billion whereas for Suncorp’s life business that figure is $1.04 billion, the analyst wrote.

Value lower than EV

And, based on CBA’s sale price and its price-to-inforce premium ratio of 1.60, Suncorp’s life business would be worth $1.66 billion.

“As a multiple of inforce premium and net profit, Suncorp’s embedded value is set at a much higher level than that of CBA’s life insurance unit,” Adams wrote.

“It is also worth noting that while a sale of Suncorp’s Life business may be below their reported embedded value through extensive use of reinsurance, the sale price won't all flow through to returnable capital.

“A large portion of the sale price will be refunding pre-paid deferred acquisition costs to reinsurers.”

Back in February, Suncorp chief executive Michael Cameron said while Suncorp would always distribute life products, manufacturing products were “dilutive” to his target of improving group return on equity to 10 per cent.

At the time, Cameron said a review of the life insurance business would include a sale, partnerships and reinsurance deals.

AMP is also thinking about a sale of its life insurance operations and ANZ currently has its life business up for sale having this week offloaded most of its wealth management business.