Christine St Anne: Suncorp recently released its profit for fiscal 2013. Today, I'm joined by the Group's Deputy CFO, Steve Johnston, to give us an insight into how the business is tracking and how Suncorp plans to give back more to its shareholders. Steve, welcome.
Steve Johnston: Thank you.
St Anne: Suncorp has given shareholders special dividend over the last two fiscal years. Steve, how do you balance returning to shareholders with a business like insurance?
Johnston: Well, we've been very much focused on improving returns to shareholders over the past two years. We've rebuilt our balance sheet. We've got a very strong balance sheet. We're an Australia and New Zealand business, very much focused on the domestic market. So, we accumulate a lot of franking credits.
Our priority at the moment is to manage our capital, maintain a strong balance sheet, but appropriately return excess capital to shareholders, and we've done that. We were the first into the market with a special dividend 12 months ago. We followed that up in the latest result with the $0.20 special dividend, along with very strong and improving ordinary dividends.
So, we're very proud of what we've done over the past two years, and we expect that over the next couple of years, we will be able to continue that capital management program in some form. So special dividends, strong ordinary dividend, yield, and growth, are the key characteristics of Suncorp.
St Anne: Of course, costs are also a focus and Suncorp improved its costs through its claims processing productivity. What other costs are you looking to reduce outside the claims processing?
Johnston: We've had two big programs over the past three years. The first one we called building blocks and that was really completed in the integration of the Suncorp and Promina businesses that merged in 2007. That was a big program. It created a single platform for our pricing and a single platform for our claims management.
Going forward, and in the last 12 months, we've actually been talking about a new simplification program, and that really builds the consolidated policy system in a general insurer, looks at the way we're efficiently running our operations. We've engaged in some partnering activity and we're improving the process that underpins our business. So, there is lot of simplification initiatives that are flowing through.
In addition to all of that, we've – a lot of people would be aware, we've actually created (our own) proprietary smash repair network. We are the largest repairer of cars in the world now, 23, what we call smart centers right across the country.
We're also now engaged in a joint venture arrangement to procure parts, given that we got a big procurement capacity in terms of our smash repair network. We're now creating a joint venture around parts procurement.
So, we've got all of these initiatives coming through that will make the business more efficient, that will improve the margin in the business, and therefore, allow us to return capital and earnings to shareholders in the form of dividend.
St Anne: Any plans to increase cost savings outside the insurance business?
Johnston: Yes, cost savings occur right across the Group. We've got a bank, a general insurer and a life insurance business. Now, all of those businesses benefit from the scale. We've got significant scale across the Group. So, we're doing things like – our real estate improving, the way we established our real estate footprint and making that more efficient. We’re also looking at our procurement processes. So, consistent purchase ordering processes to drive down our costs, so all of the businesses benefit from the scale of the Group.
The general insurance business benefits from the initiatives that have been going on in there, but all the businesses are very much focused on their cost base, driving down their costs, improving their growth and driving margins through to the shareholder.
St Anne: Of course, Suncorp has a diversified business. Steve, how are you achieving cross-selling across all those businesses? Would that be a key focus for the Group going forward?
Johnston: They are very obvious areas of cross-sell. So, when someone buys a mortgage from our bank, there is a very easy and legitimate cross-sell to sell home insurance and similarly on the motor side. So, those things are well established within the Group and happen quite seamlessly.
The big opportunity for us is in a life insurance business is to sell simple life insurance products to a general insurance customer base. We’ve got about 5 million customers in that general insurance customer base. They are happy to buy life insurance products from their general insurer. They see an insurance company as an insurance company. We have to improve the way that we distribute, line up our distribution workforces and our sales workforces to make that cross-sell opportunity even greater.
But above all of that, the Group – having the Group together from a customer point of view, gives us a lot more data. So, smaller businesses in particular, the bank and the life business, benefit from the depth of data that we have around customers. We’ve got a 9 million strong customer base at Suncorp, which puts us on the same footing as the major banks. So, we got to leverage that strongly to drive strong growth at the topline.
St Anne: The life insurance business has struggled somewhat, what are your plans to revitalize that business?
Johnston: Well, the life insurance business, like all life insurers are struggling with both cyclical and structural issues. The cyclical issues really come from the cost of living issues at the moment and low consumer confidence. So that creates an environment where claims experience is higher and lapse experience is higher. So, all life insurance businesses are struggling from that situation.
On the structural side, the way that commissions are structured for IFAs is very much upfront and then it travels off over the life of the policy. And the policy from a policyholder point of view once they go through their 20s and into their 30s and 40s, it steps up quite considerably. So, there is a structural misalignment there that creates an environment where there is an incentive to churn, which is driving a lot of the lapse experience.
Our big opportunity is, as I said before, is to drive direct sales from a life insurance business through a general insurance customer base. That will give us the opportunity to transition as the industry restructures and gets more efficient around its commission structures and the structure of its policy.
So, we are very comfortable that over the next 18 months to 2 years, we’ll have a very strong ability to grow through our direct business; that the structural and cyclical issues, that are affecting our IFA business, will improve and that will lead to a very strong business over the next two to three years.
St Anne: Steve, what about the banking division, any immediate plans to grow that business and how is the expansion outside of Queensland tracking?
Johnston: We’ve incrementally expanded our branch networking in both New South Wales and Western Australia, where we have a reasonable brand presence and a customer alignment certainly between Queensland and Western Australia. Obviously, the majority of our branch network is in Queensland. We use brokers for distribution outside Queensland and within Queensland as well. We are solid users of the broker-distribution network, and we are very good and efficient in doing that.
We'll continue to incrementally expand our branch network, particularly in New South Wales and Western Australia, and align the branch network in different growth corridors within Queensland. We don't have any major plans at the moment to expand our branch network substantially in other jurisdictions because we've got this broker opportunity that we can continue to leverage.
So, it will be an incremental branch expansion, particularly in Queensland, where we can move some branches around, reestablish them within the growth corridors, take opportunities around a very strong brand and distribution and grow strongly ahead of system.
St Anne.: On that point of regional banking, Steve, how does Suncorp distinguish itself against the four major banks? Is that your only point of difference?
Johnston: In Queensland, we are seen as a major, because our brand is so strong in Queensland. Customers know us very well, and they often have a lot of exposure through our general insurance business. So, we have a very strong brand in Queensland.
So, we see ourselves as a major bank, but the capacity of a major bank in terms of the capability, but also the customer service that customers like around the regional banks which is very, very quick, talk to a real person, say you don't go through the IVR process, you go directly to a real person in our bank and improving customer service. So, the customer service is our big differentiator in Queensland, but we have the depth of capability and capacity and security that the majors have. That's the way we sell a bank within Queensland and generally across the country.