Suncorp writes off $500m

Suncorp is writing-off around $500m (after tax) of intangible assets from its Life Insurance business as the life insurance industry drowns in claims and policy lapses. The annual result will include a $350m write-off of goodwill and a further $150m loss due to higher expected claims. As they're accounting for 'non-cash' losses, Suncorp’s underlying earnings and dividends won't be impacted, though we'd prefer management to be upfront and lead with the pre-tax loss amounts.

Chief executive Partick Snowball said the revised claims and lapse rate assumptions reflect the life insurance industry’s deterioration. As we explained in Suncorp: Interim result 2014 on 19 Feb 14 (Hold – $12.26), higher unemployment is increasing income protection claims and encouraging customers to let their policies lapse. Higher claims lead to premium increases, which makes life insurance less affordable at the worst possible time for unemployed customers.

Turning to the General Insurance division, favourable weather conditions have reduced natural hazard claims $25m below the allowance for the financial year to 30 April. An extended drought in North Queensland, however, has increased the amount of impaired loans by $69m, or 17%, to $485m at Suncorp Bank. Impaired loans still represent less than 1% of the total lending portfolio.

The company reiterated its target payout ratio of 60-80% of cash earnings. After adjusting for the Life Insurance write-off, Suncorp still has $1.1bn of surplus capital, potentially allowing for a special dividend later in the year following those paid in 2012 and 2013. Suncorp’s share price is up 9% since 19 Feb 14 (Hold – $12.26) and we’re sticking with HOLD.