Suncorp (ASX: SUN), owner of brands such as AAMI, GIO, APIA, Suncorp, Vero and Shannon's, yesterday provided an upbeat guidance on its full-year results.
Despite incurring a larger than expected $630 million loss from the sale of its 'bad bank' loans to Goldman Sachs in June, the company has forecasted profits to be between $480 million and $500 million. This is down on the previous year but on an underlying basis, the annual earnings are between $1.21 billion and $1.25 billion, up from $1.03 billion last year.
It has attributed much of the gains to a 'benign' year of natural weather events and as a result, its insurance business raised premiums and paid out fewer big claims. This will allow the company to pay a final dividend of 30 cents per share, up from 20 cents last year.
Mid-July, Insurance Australia Group (ASX: IAG) also announced an increase in its insurance margin, a key indicator of profitability, to 16.8%-17.2%. The company attributed much of the gains to "less natural peril payouts".
A year ago, compared to its peers, Suncorp shares were cheap. Plagued by $17.5 billion in commercial property loans that went sour after the GFC, the company has spent the last four years paying them down. Once Goldman had agreed to purchase the bad debt for almost $1 billion, investors flocked back to Suncorp, believing it to be a sound investment – they appear to have got it right.
Suncorp's full year NPAT was always going to come in lower because of the loss it incurred from the transaction with Goldman, however, its medium term prospects are good. Despite increasing some 60% in share price over the past year and trading at what seems to be quite high earnings, its new cost restructuring, lower amount of debt and increasing premiums will bode well for shareholders.
Foolish takeaway
When insurance stocks are debt-free and can enjoy a year without a huge amount of claims, they usually beat the market but it can go both ways. Insurance stocks can carry a higher amount of risk, which is why it's important to get them at their best possible price and hold them for the long term.
Suncorp will release its full-year results on August 21. In the meantime, discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."
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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.
