Suncorp Group Limited (ASX:SUN) reported 16% lower net profit after tax (NPAT) for the six months ended 31 December 2015.
Suncorp reported NPAT of $530 million for the first half of 2016, which is 16% lower than the previous comparable period (pcp). The board declared a 21% lower interim dividend of 30 cents per share, representing a payout of 69% of cash earnings.
General Insurance Suffered from Natural Disasters
NPAT in the general insurance segment was $297 million, which was adversely impacted by higher than expected natural hazards and investment market volatility. The Insurance Trading Result (ITR), which is an important measure of profitability, declined to 10.1%.
Personal insurance Gross Written Premium (GWP) returned to growth, increasing a modest 0.6% as a result of growth in average premiums offset by the exit of some corporate partner relationships. Commercial insurance Gross Written Premium grew by 2.2%, driven by development across the compulsory third party (CTP) portfolio, which was partially balanced by a negative impact from the Western Australian workers’ compensation portfolio.
The Group CEO Michael Cameron commented on the workers’ claims: “My number one priority has been resolving these issues. We have moved quickly with an intervention strategy designed to restore performance. Our target is to deliver lower working claim costs, which together with other initiatives, will drive a higher underlying ITR of the fully year.”
Positive Results from Banking Operations
Suncorp Bank delivered an after tax profit of $194 million, underpinned by strong quality experience and a continued focus on sustainable, quality lending in a highly competitive environment.
Home Lending grew 3% over the half year, with strong intermediary resulted in 60% of new business originating outside the traditional Queensland market. The Net Interest Margin improved 1.85%, reaching the upper end of the target range.
Along with this, the bank’s cost to income ratio improved to 53% for the period, which was fortified by disciplined cost management to support investment in strategic programs.
However, gross impaired assets reduced by 32.8%, while the gross non-performing loans were reduced by 15%.
Life Insurance Profit up 10%
Suncorp Life’s underlying NPAT increased more than 10% to $58 million, as overall claims and lapse experience had a favourable impact worth $8 million. Moreover, total in-force annual premiums rose 5.2%, reflecting Life’s continued focus on retention and value over volume strategy, ensuring new business is written on a more sustainable footing.
Strategy and Outlook
Mr. Cameron explained the group’s strategy: “Immediate actions will include an adjustment to discretionary spending. Our brands will be rationalised and we will ensure that we realise the project benefits from past and current investments including the $170 million optimisation benefits expected in 2018.”
The group stated that improving underlying NPAT, achieving sustainable ROE of at least 10% with an underlying ITR of at least 12% are the medium term targets.
SUN is down 1.4% (As at 10:24 AM AEDT) since the announcement, as investors are trying to digest the mixed results.
Author: Simon Herrmann
Feb 11, 2016
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.