Suncorp: Result 2015

When the former British tank commander Patrick Snowball arrived at Suncorp back in 2009 many were sceptical. With his heavy stature and colourful shirts, he'd been likened to a bison that had run through a clothes line, and many thought sorting out Suncorp would be beyond him. We were among them, maintaining the Avoid recommendation we'd had on the stock for over five years.

But while there's still work to be done, Suncorp is in far better shape now than it was when Snowball took over in 2010: less complex, leaner and performing much better.

The share price reflects as much: in the five years before Snowball took over, the share price pretty much halved from $14.60 to $7.87; in the almost six years of his tenure it has nearly doubled back to $14.43.

The improved performance shows through in the results of the company's general insurance business. This business - its largest - contributed around two-thirds of underlying net profit through brands that include AAMI, GIO and Vero.

Operating expenses as a proportion of net earned premiums, for example, fell from 23.0% to 22.6% in 2015 and are down from 26.5% in 2010. Meanwhile, the underlying insurance trading result (ITR, defined as the underwriting profit plus investment earnings on insurance funds as a percentage of net earned premium) rose as a percentage of premiums for the fifth year running, to 14.7%, up from 14.3% in 2014 and a mere 9.0% in 2010.

These improvements are built on firm foundations, with improved customer satisfaction and retention. During the course of the year satisfaction rose past the industry average in the key motor and home insurance lines.

Cruel blows

All this tilts the odds in Suncorp's favour, but insurance remains a game of chance and fate dealt the company (not to mention its policyholders) a series of cruel blows in 2015, most notably the Brisbane hailstorms last November ($250m in net costs), Cyclone Marcia in February ($149m) and the NSW stoms in April ($135m). All up net claims of $5,587m included $1,068m from weather and other natural hazard 'events' – $473m more than the company had bargained for. This dragged the general insurance net profit down 25% from last year's record billion dollar profit, to $756m.

Suncorp Bank went the other way, increasing net profit by 55% to $354m, largely due to a halving of impairment losses from $124m to $58m. Net interest income also saw a handy 9% increase to $1,103m, and the cost to income ratio fell from 57.4% to 53.4% to give a 22% rise in profit before impairments.

Suncorp Life also had a good year, increasing underlying net profit by 35% to $113m, helped by a 6% premium increase and a 7% fall in operating expenses.

Special dividend

The strong performance has increased the company's surplus capital, which is dominated by a $771m excess in general insurance and now totals $1,213m. That will be reduced to $570m, however, by the payment of dividends, comprised of a 38 cent final dividend and a 12 cent special dividend. The final combines with a 38 cent interim dividend to give 76 cents for the year.

When Michael Cameron replaces Snowball as chief executive in October, he will inherit a business in far better shape than six years ago. We view it as a positive that Cameron has been a non-executive director of Suncorp since 2012 and should therefore have a good knowledge of the business. He also has a solid CV, coming off a 6-year stint as chief executive of GPT Group, 18 months as chief financial officer of St George Bank (ending with its takeover by Westpac) and five years in various roles at Commonwealth Bank, including 'group executive' and chief financial officer of its retail banking division.

The stock is up slightly since Suncorp: Interim result 2015 on 13 Feb 15 (Hold – $14.15) and sits on a multiple of 16 times the 2015 cash earnings per share of 92 cents and a fully franked dividend yield of 5.3%. That doesn't look excessive but is still some way away from tempting us. We're nudging up our Buy price to $10 (from $9) and our Sell price to $18 (from $17). HOLD.