Suncorp: Interim result 2013

The turnaround at Suncorp orchestrated by chief executive Patrick Snowball is nearly complete. With bad debts and losses from natural disasters falling, further shareholder friendly moves are a distinct possibility.

Turning to the interim result, profit for the general insurance business – which includes familiar brands such as AAMI and APIA – more than tripled to $564m compared to the same period a year earlier due to a benign claims environment.

A $144m profit from the ‘good bank’ was almost perfectly offset by the $143m loss from the ‘bad bank’, while Suncorp’s life insurance business is struggling; profit fell 62% to $51m. Including $42m of acquisition amortisation costs, overall profit increased 48% to $574m. Cash earnings per share increased 41% to 48 cents and a fully franked interim dividend of 25 cents was declared, up from 20 cents (estimated ex date 28 March).

General insurance the hero

The general insurance business was clearly the hero, with gross written premium increasing 10% to $4.2bn largely thanks to home insurance premium increases. The division holds over a billion dollars in excess capital, but another special dividend (for example) is unlikely until at least the end of the financial year. Suncorp had already used up a large part of its annual reinsurance protection in the seven months ending in January, so a sudden increase in claims from a natural disaster could substantially reduce the capital buffer.

The bad bank is now down to just $3.4bn in assets, with $1.6bn impaired (down from $2.3bn). Assets are expected to fall to $2.7bn by the end of the calendar year, potentially allowing for a return of capital to shareholders. Low interest rates, high employment and falling bad debts are creating a favourable environment in which to unwind the problem loan portfolio.

Aside from low investment returns due to low interest rates, Suncorp’s general insurance business is firing on all cylinders and the share price has increased accordingly. Value hounds will likely need a string of natural disasters before the share price offers a decent margin of safety.

Upgraded following turnaround

As the company is in the best condition it’s been in for some time, we’re increasing the prices in the recommendation guide. We’re still a long way from a positive recommendation, but despite the share price increasing 27% since Suncorp: Result 2012 from 30 Aug 12 (Avoid – $9.05) we’re upgrading to HOLD.