Suncorp share price dives on earnings miss

Suncorp’s Group’s full-year profit has risen 4 per cent to $1.08 billion on the back of reasonable premium growth and a fall in claims costs in its Aussie insurance business. However, the financial services group missed analyst expectations causing the share price to plunge 6 per cent to $13.63 on Thursday.

A strong performance in the insurance business - driven by rising insurance prices - was offset by a weak result in the wealth business, while the quality of the bank result was poor. This year saw a fall in its New Zealand division’s profit thanks to the impact of the Kaikoura earthquake and the ongoing Canterbury insurance claims.

Net earnings for the Group’s Australian business surged 30 per cent to $723 million. Gross written premium was up 3.9 per cent to $8.11 million due to premium increases in Home and Motor products, as well as increased customer numbers following the successful entry into the South Australia compulsory third party insurance market and strong growth in New South Wales.

Suncorp released $301 million in reserves that had been set aside old claims, an amount it said was "well above long-term expectations" and a reflection of “very low inflation.”

The reduction in the number of active claims to more normal levels helped the insurer achieve an underlying insurance trading ratio of 12 per cent in the second half. This is a huge improvement on first-half underlying ITR of 11 per cent even though the annual margin settled back at 11.5 per cent for the full year.

This compares to underlying ITR of 10.6 achieved in the previous year.
 

Digital strategy

Suncorp chief executive, Michael Cameron, said the result reflected disciplined margin management and a balance between reducing costs and investing in future growth.

“Consumer working claims operational metrics have returned to sustainable levels with improvements in home and motor loss ratios.” 

At an analyst briefing, he talked of ploughing an extra $100 million into developing its digital marketplace this year in a bid to “seize the opportunity ahead of competitors to accelerate the business overhaul".

This customer-centric strategy is one of the ways that Cameron plans to lift total group return on equity to 10 percent.

The chief executive also noted that for the first time in several years Suncorp has reported an increase in customer numbers, with 399,000 new customers joining the Group.

However, analysts were less than impressed with Thursday’s result saying earnings missed consensus estimates by 6.4 per cent although they acknowledged that the 12 per cent underlying ITR margin target was reached in the second half.
 

Banking and wealth

Citi’s Nigel Pittaway noted the headwinds for 2018 and said he was not sure the market would like the extra $100 million investment in the marketplace strategy, which will impact next year’s cash earnings.

“GWP growth of 3.9 per cent  was disappointing, below consensus of 5.4 per cent with soft Home and Motor growth of only 2.4 per cent - despite unit growth - and Commercial down 2.2 per cent despite Suncorp talking up strong rate increases in the June renewals," he said.

“Reported margins - as opposed to underlying margins - were lower at 11.2 per cent with items such as reinsurance backup cover costs and restructuring expenses higher than expected. Looking ahead, there will be a 90 basis point headwind to margins from the $72 million increase to the CAT budget of $692 million on top of Queensland compulsory third party insurance change impacts.”

On the topic of the natural disaster budget, Suncorp said the reinsurance cover bought last year provided effective protection and delivered a significant earnings benefit. A similar cover has ben purchased for 2018.

Suncorp’s banking and wealth business reported a drop in annual net profit from $418 million to $400 million because of investment in the core banking and wealth platforms. Earnings for Suncorp Bank were $396 million,up slightly on the $393 million posted in 2016. Importantly, the lender achieved a greater than 12 per cent return-on-equity.

“The result reflects a sustainable approach to lending and funding through a period of changing economic and regulatory dynamics,” Suncorp said in a release.

Lending growth of 1.9 per cent reflected improved momentum in the second half of the financial year despite APRA curbing the lending of riskier mortgages. Impairment losses were low at just $7 million but higher costs meant a lower underlying profit than expected, according to Pittaway.

Net interest margin increased to 1.87 per cent for the second half, above the target range of 1.75 per cent to 1.85 per cent. Net profit for the life insurance business of $53 million was flat on last year and there was no talk of offloading the business.

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