Shareholders in Brisbane-based insurer and bank, Suncorp face a tough year as the company’s profits have been hit by the surge in natural disaster claims and the weak home lending and consumer finance markets.
Interim payout to shareholders has been chopped 21% – from 33 cents a share to 26c a share, fully franked.
The company revealed yesterday that first-half profit has almost halved to $250 million, with the financial services provider citing the impact of natural hazards such as the Sydney hailstorm in late December and volatile investment markets in the final quarter of 2018.
The financial services conglomerate reported a 12.5% drop in cash earnings to $413 million, as it exceeded its allowance for natural peril claims, due in particular to widespread damage to Sydney motor vehicles in late December.
On top of this, the company took a $145 million write-down on the sale of its Australian life insurance business.
But earnings from continuing operations were still 11% lower in the half year.
Now the company is set to be hit this half by the impact of flood-related claims from Townsville and other parts of Northern Queensland.
Because of the rising toll from storms and other natural disasters Suncorp says it will lift its natural hazard allowance by $100 million to $820 million next financial year, and buy an extra $200 million in reinsurance for natural disaster claims. It already has substantial reinsurance deals in place with some of the world’s biggest insurers.
It also said expenses on regulation and systems would be $50 million higher than estimated for this year, and it will increase investment in “regulatory projects” next year “to meet community and customer expectations.
CEO Michael Cameron said the higher costs from reinsurance, an increased claims allowance, and greater regulatory spending would affect its returns, and it would quantify this impact at its full-year results later this year.
Mr. Cameron said the higher claims allowance was based on a “shorter-term” view of weather events. He said Suncorp had changed its thinking in this area.
“What’s changed is we’ve now taken probably a shorter-term view of history, and a good look at expectations about the future, and factored those things in to come up with what clearly has been an issue for some time, that we’ve moved up the allowance by $100 million,” he said on a call with analysts.
Mr. Cameron said some of the recommendations from the royal commission that would have the biggest impact on Suncorp included changes to remuneration, mortgage broker commissions, and the introduction of unfair contract laws in insurance.
Across its divisions, net profit after tax in its core insurance division fell 43.2% to $133 million, amid a 4.8% in its net incurred claims. The life insurance business, which it is selling, posted a 45% decline in profits to $23 million.
Profit from continuing operations at Suncorp’s banking and wealth unit fell 3% to $183 million, driven by a decline in net interest margin over the six months to December 31 partly related to rivals’ aggressive mortgage pricing.
(Weakening net interest margins were also a feature in the recent interim results from Bendigo and Adelaide Bank, the Commonwealth and the December quarter trading update from the NAB).
A key bright spot was in New Zealand, where Suncorp’s profits jumped 82% to $111 million, thanks to strong growth in premium income, and relatively few natural disaster claims (ie no earthquakes).
Suncorp shares fell 3.7% yesterday to end the day at $12.98.