Sun rises with general insurance the star

What’s new

Suncorp continues to make steady progress on its comeback trail, reporting an interim fiscal 2013 group net profit after tax of $574 million, up 48 per cent from a year ago. General insurance was the star of the period, delivering a profit after tax of $564 million, representing more than a tripling in profit from the corresponding period beforehand. This was driven by a broad-based 10 per cent increase in gross written premiums, lower insurance claims from natural hazards and relatively buoyant investment market movements.

The stellar general insurance result was partly offset by Suncorp’s other main businesses, with the core banking division’s profit after tax down 8 per cent to $144 million and the life-insurance division’s underlying profit after tax down more than 12 per cent to $61 million. Part of the problem with Suncorp’s life-insurance division is an industry-wide issue, with increased lapses and experience claims suppressing profits.

The group profit also continued to be dragged down by the runoff of the non-core bank assets, with a $143 million loss in the first half. We expect these losses to continue for a few years, created to house Suncorp’s problem loan portfolio in the wake of the financial crisis to provide more transparency on its core businesses. While the residual portfolio has shrunk almost 80 per cent in two years to $3.4 billion, a higher percentage of it is impaired.

Outlook

Suncorp is making progress against its three-year road map, named ‘‘Building Blocks’’. The strategy sets out to deliver $235 million in annual savings by this year, improve margins and refocus the group. With the cost take-out well on track, management has announced an additional annual savings target of $200 million to be taken out by 2016 in its ‘‘Simplification’’ initiative, focused on streamlining its legacy IT infrastructure.

The company is also well-placed to reward shareholders with a healthy dividend in the second half of fiscal 2013, with the prospect of a special dividend on top. The board erred on the conservative side, with a lower-than-expected interim dividend of 25¢ a share. This equated to a payout ratio just more than 50 per cent, far shy of the company’s full-year target payout of 60 per cent to 80 per cent.

With ample room left in the $520 million natural hazards allowance for the fiscal 2013 year and more than $1.2 billion of excess capital, however, the company is set to declare a bumper second-half dividend.

Price

While its response to the interim result has been muted, the stock has had a strong run in the past six and 12 months, rising 25 per cent and 46 per cent respectively, easily eclipsing the market. Investors have embraced Suncorp’s refocus on its core operations while appearing relaxed about its capital position against a backdrop of an improving market and a relatively benign catastrophe-claims environment.

Worth buying?

Suncorp is making strides on its path to delivering value to shareholders by stripping out cost, winding down non-core banking, improving general insurance margins and returning capital. We continue to see material upside potential from this program, which is not yet reflected in the stock’s sub-14 times price-earnings multiple on still-depressed earnings. So we believe it is worth buying at current levels.

Greg Smith is Head of Research at Fat Prophets sharemarket research. To receive a recent Fat Prophets Report call 1300 881 177 or email info@fatprophets .com.au