Investment Matters

Profit reporting season: Suncorp

This week Suncorp released its financial results for the year ending 30-Jun-16.  Overall, the result was in-line with expectations, with the diversification of the company's businesses being a positive note.

The company's insurance operations showed improvement in the second half of the year, after claims' experience had a detrimental impact on the first half, along with above allowance natural hazard costs.  The underlying insurance margin increased from 10.1% in H1, to 11.0% in H2.  Over the medium-term a return to 12% is being targeted. 

The company has put in place additional future natural hazard reinsurance, to reduce the earnings volatility that these claims have been causing in recent times. 

Reported profit was also impacted by lower investment returns.  Conditions continue to deteriorate in relation to investing insurance and shareholder funds - earnings decreased from $562m in FY-15 to $355m in FY-16.  Low interest rates, lower inflation, widening credit spreads and volatile equity markets were negative factors of note.  We view this as, for the most part, being outside of the control of Suncorp.

GWP (gross written premium) growth was +1.8%. with good growth in motor, home and CTP being offset by flat commercial and negative workers compensation lines.  Given the current competitive environment, we view this positively.  GWP is a pointer to future revenue.

The company's bank operations grew profit 11.0% year-on-year.  Lending grew 4.5%, net interest margin increased marginally, cost to income fell to 52.5% (with <50% targeted), and impairment losses decreased - impressive in the current environment.  The company has also completed a major investment in a new core banking system.

The Life business (life insurance, income protection insurance and the like) grew profit by 13.6%, with positive claims and lapse experience.  After some difficult years in this division (which has been experienced more broadly across the life insurance sector), it is pleasing to see that this division has stabilised and has made a meaningful earnings' contribution for the second year.

The company's capital position remains strong, with $346m in excess capital at group level (to CET1 target post dividend).  The company is erring on the conservative side, and retaining this capital for the time being.

The company paid out 80% of its cash earnings.  However, with a special dividend provided in FY-15 (return of surplus capital), and lower cash earnings from the insurance division, the dividend fell y-o-y.

In summary, Suncorp's result is nothing to get too excited about, but insurance is trending in the right direction, and it is a solid result in a low-growth world.

Suncorp half year result