Insurance giant Suncorp (ASX:SUN), have reported that their ‘General Insurance Margin’ will be affected for the half year ending 31st December 2015, due to increasing costs of settling claims.
Suncorp attribute this to a series of circumstances, namely last year’s record run of natural hazard events, along with a lower Australian dollar.
Suncorp CEO Michael Cameron commented on the recent surge in costs: “Costs have been increasing as a result of the lower Australian dollar and the impact of the $4 billion of weather events during 2015. These increased costs will have a significant impact on the underlying margin in our Personal Insurance business.”
In addition to the recent surge in costs from the lower exchange rate and the onset of hazardous weather events, the Suncorp’s ITR (Insurance trading ratio), a measure of profitability, will be affected by a multitude of factors. These include a $75 million increase in the natural hazards allowance, higher than expected large loss experience in commercial insurance, greater amount of compulsory third party claims in NSW, and lower investment yields. As a result, the ITR is forecasted to be around 10% for the half year ending 31st December 2015.
However, the ITR for the full year should be further supported by increased claims management, pricing initiatives, along with a ‘Group Optimisation Program’, which is on target to record $170 million in benefits within the 2018 financial year.
Moreover, Suncorp group is expecting to report a positive ‘Gross Written Premium’ (a measure of total premium by the insurer before deductions), for the half year ending 31st December 2015. With the ongoing progress in long-tail claims management, and lack there-of inflation, Suncorp is expecting net reserve releases between 3-3.5% of Net Earned Premium for the six months ending 31st December 2015.
CEO Michael Cameron spoke optimistically about the short-term pressure facing Suncorp: “I’m confident we can address these challenges and continue to drive changes that improve outcomes for our customers, shareholders and other key stakeholders”.
SUN closed at $13.05 on 11th December, however investors “punished” the stock this morning sending it down approximately 10% in early trade. Prior to today SUN has contracted 7.2% year-to-date, which when compared to competitors in the insurance sector such as QBE or AMP, is comparatively weak.
Suncorp is set to release its financial results for the 6 months ending 31st December 2015 on the 11th February 2016. The group’s dividend, to which they aim for 60% to 80% of cash earnings, will be announced on the 11th February 2016, with an ex-dividend date of 18th February 2016, and a payment date on the 1st of April 2016.
Author: Simon Herrmann
Dec 14, 2015
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.