Last year the perfect storm hit Suncorp, now clearer skies have been helping to make up the difference.
For once the financial services group’s flagship insurance business has been a positive contributor to profit, helped by surging investment income and the low rate of payouts linked to storms, floods and fires.
This improved external environment for personal insurance has made Suncorp’s path to recovery easier to navigate.
The hybrid bank and insurer is trying to get itself back in favour with investors after years of missteps, near fatal banking errors and disappointing returns.
But the negative surprise of a 5 cent a share dividend cut, shows new chief executive Patrick Snowball is not looking to make quick friendships. Rather he is managing Suncorp as a medium-term prospect.
The dividend cut suggests the company is taking a highly cautious view and moving to horde capital knowing full well that any unforseen external shocks will hit it harder than the cashed-up big four banks.
At the same time, Suncorp’s bank faces the double whammy of margin-sapping regulatory pressures and question marks over its long-term funding book.
Suncorp's latest first half profit of $364 million falls right in the middle of a $355 million to $375 million guidance range issued last months. While this represents a 41 per cent increase over the same time last year, it is unlikely to be enough to trigger much excitement in Suncorp’s shares.
A year ago Suncorp’s shares were languishing at a little over $4.50. They have since surged to more than $9. But today shares fell 35 cents, or 3.8 per cent, to $8.86 in early trade, showing there was little in this result for investors to back recent gains.
Just 12 months ago Suncorp was a company in crisis, searching for a new chief executive and drowning in a sea of bad debts.
At the time, the only thing missing for Suncorp was pestilence as its insurance brands AAMI and GIO, were pummeled by plunging investment returns and huge payouts linked to storms, flooding and bushfire claims.
Suncorp’s banking lending book meanwhile was stuffed full of shoddy commercial property exposures and high-profile corporate losses.
A split of the $50 billion bank last year before the arrival of chief executive Patrick Snowball into a “good” and “bad” lending book at least calmed investors given they offered a better look at where Suncorp’s problems lay.
The bad bank is clearly still causing headaches for Suncorp, even as the loans book is being run down – including by nearly $2 billion over the past six months.
The health of this non-core book is improving as the economy improves, but bad loans are running high.
Impairment losses on the bad bank were running at around 3.17 per cent of the total lending book, compared to some 4.56 per cent from the June quarter.
The $37 billion good bank is in much better shape with lending losses falling to just 0.39 per cent of loans. However, it looks to be in a holding patten with lending growth anaemic.
Suncorp’s general insurance business is performing as expected given the favourable operating environment. Cash profits of $347 million are up 89 per cent on last year. Suncorp’s insurance margin of 12.8 per cent comes in below Insurance Australia Group’s recent guidance of 13.4 per cent.
Much of the difference reflects Suncorp’s higher exposure to the Queensland property market which was hit harder by storms during the December half while the Queensland compulsory third party is running at a higher reserving cycle.
Rival IAG is scheduled to deliver its interim profit tomorrow. Earlier this month IAG, the insurer behind NRMA and RACV, also cited better weather as well as higher premium increases as driving its improved profit outlook.
Over the near term investment sentiment will be driven by performance of Suncorp’s non-core bank lending book with a concentration of higher risk commercial property exposures mean that any easing in bad debts will lag the bigger retail rivals.
Mr Snowball is also looking to drive the insurance business harder, by merging the brands into separate units. This is expected to generate material cost savings with the consolidation of risk pricing, policy and claims systems.
He is also looking to exit lower margin businesses – including the announcement of the sale of its Royal Automobile Club of Queensland (RACQ) and the Royal Automobile Association of South Australia (RAA) joint ventures.
While insurance will undoubtedly continue to power Suncorp’s results into the future, helped by rising bond yields and premium hikes, the business faces some big structural headwinds.
The biggest of these being personal insurance customers that make up some 67 per cent of insurance sales, are increasing moving online where the margins are thinner and competition is just starting to heat up.
ejohnston@theage.com.au
