Suncorp Group Limited (ASX: SUN) is in a state of transition as it builds up its banking and beefs up its financial strength following large natural disasters. The share price has recovered well over the past two years, but what does it have in store over the next several years?
Building up base with insurance and extra capital
The company's main source of revenue is general insurance through its brands such as Suncorp, AAMI, Apia and GIO. 2009 and 2011 had larger than average natural disasters – Cyclone Yasi, the Brisbane floods, and Christchurch earthquake to name a few. The catastrophic losses from those years well exceeded the $500 million long run average by several times, especially 2011's losses of over $4.5 billion. However, in the last 25 years above average levels have only occurred previously in 1999 and 1989.
The company has improved its balance sheet strength by increasing reinsurance arrangements, as well as having over $1.2 billion in capital above its conservative operating targets. This amount is after accounting for dividend payments, and the company just announced a 40% increase of the interim dividend to 35 cents per share.
Banking segment improves
Its banking segment had great improvement, raising earnings to $105 million, up from $4 million in the first half of 2013. This was thanks to the final disposal of its "bad loan" non-core bank in FY2013 that had been depressing earnings. The company will improve group yields by further de-risking the banking arm, in addition to reducing its Suncorp Life insurance capital consumption.
Outlook for 2014-2015
It is targeting 7%-9% growth per annum across the business lines after achieving a 6.6% increase in half-year total gross written premium. Although group net profit was down 4.5% to $548 million, it was seeing margins improvement as its underlying insurance trading ratio went from 13.4% to 14%. This ratio is the net profit as a percentage of net earned premium.
What will be of particular interest to shareholders is the company's plan to continue returning surplus capital in excess of its needs. Benefits of its business simplification are expected to be around $225 million in FY2015, which may flow towards dividend improvement. Dividend yield currently is 4.43% and its PE ratio is 32.3.
Foolish takeaway
If history is a guide, then the chance of having gigantic natural disasters like in recent years may be relatively low. It has improved its reinsurance coverage to meet potential claims, and has built in a sizeable margin of extra capital should unforseen events happen.
I would expect operations and margins to improve from its scaling back and cost cutting. That should give shareholders more assurance and the company more capital strength as well.
