Suncorp: Result 2016

With its banking and life insurance businesses back on their feet, the focus switches to the lagging general insurance division.

Suncorp's strategy will focus on 'elevating the customer to drive growth and increase resilience to volatility', said chief executive Michael Cameron at today's full-year results announcement. We're not sure that customers really want to be elevated, but that's within the normal parameters of corporate gobbledygook. It was the simple claim that followed that irked us, that 'the benefits of this strategy will continue to be seen over the medium term'.

For something to continue, it first needs to be happening – but this year's performance from Suncorp was nothing to write home about, not by a long shot.

Key Points

  • Growth and margins lacklustre

  • Banking and life growing profitably

  • Achievable goals for next two years

The general insurance division’s profit fell 18% to $624m in the year to June due to higher claims expenses and low returns on the company’s investment portfolio. Gross written premium (the industry’s measure of revenue) was 2% higher at just over $9bn, with personal insurance lines increasing by 1.6%, and commercial lines by 2.1%.

The loss ratio was flat at 71% but a reduction in operating expenses meant that the underwriting profit margin improved slightly from 6.4% to 6.7%. However, once you factor in a 36% fall in investment returns – which won’t be helped by the RBA’s decision to cut interest rates yesterday – the company’s insurance profit margin fell from 11.4% to 9.9% (well below Suncorp’s target of 12.0%).

Bank and Life

Table 1: SUN 2016 result
Year to Jun 2016 2015 /–
(%)
Gross written premium ($m) 9,031 8,872 2
Insurance profit ($m) 624 756 (18)
Bank profit ($m) 393 354 11
Life profit ($m) 124 113 10
NPAT ($m) 1,038 1,133 (8)
EPS (cents) 79.8 87.21 (9)
Final dividend 38 cents, fully franked, (down 24%),
ex date 12 Aug

It was another strong year at Suncorp Bank, though, with net profit up 11% to $393m, due to growth in lending and a larger gap between the interest rate the bank pays on deposits and what it receives on loans. This ‘net interest margin’ – the bank’s key measure of profitability – improved from 1.85% to 1.86% and non-performing loans fell by 1% to $610m.

We were pleased to see the bank’s stand-alone credit rating lifted by Standard & Poor’s from ‘bbb ’ to ‘a-’, reflecting improvements to its balance sheet and loan book.

Suncorp’s life insurance division increased underlying net profit by 10% to $124m, mainly due to lower than expected claims and a higher margin built into policies. Premiums increased 6% to $1.0bn. This division has come a long way since $350m of its goodwill was written off in 2014.

Management laid out its goals for the next two years: to maintain a flat cost base; to generate a return on equity of 10% (up from this year’s 8.2%); and to distribute between 60% and 80% of earnings. With the banking and life businesses back on their feet, those goals are within reach. But management will need to work on underwriting margins at the general insurance division (60% of net profit) to get over the line.

The share price has risen 28% since Suncorp: Interim result 2016 from 11 Feb 16 (Hold – $10.41), giving a price-earnings ratio of 16. We continue to recommend you HOLD.

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