Following the announcement for a $500 million write-down in its life insurance division, Suncorp Group Ltd (ASX: SUN) Group CEO Patrick Snowball told shareholders in a teleconference that the life insurance business will be depressed for another three or four years.
What: Life insurance for the company and its competitors in general has been deteriorating recently. Customers are letting policies lapse more and are shopping around for better deals due to the way premiums are structured to increase over time. Sizable advisor commissions also add to payback time for new policies.
So What: Until it can revert back to normal business conditions, the big write-down is to adjust the company's valuation assumptions for the life insurance arm. Investors may be thinking of heading for the doors, but there are three things they should consider to keep things in perspective.
1) Life insurance is a small part of total revenue share
Of the three business divisions, life insurance generated only about 13 per cent of total revenue in FY 2013. General insurance and banking were about 65% and 22% respectively. Life insurance in a short-term depressed condition doesn't mean the whole business is going under.
2) Reinsurance pricing is lower due to less natural hazards
Some earnings relief may come for its general insurance division in the form of lower reinsurance pricing. Reinsurance is the insurance coverage that the insurance company itself takes out to make sure it can handle claims payouts. The past year or so has been without any large scale natural catastrophes, so there hasn't been any major claims pressure and hence lower pricing costs.
3) Banking is improving and tightening up its lending
Its banking division is improving, with $105 million in operating earnings in the first half, way up from a net loss in the previous corresponding period. With the rise in residential mortgage lending from a growing housing market, it is keeping a conservative stance by tightening its lending standards and focusing on lower lending ratio loans.
Now What: Suncorp has revised its growth targets down from 7%-9% to 4%-6%, so not everything is cheery. However, the company stressed that the write-down is a non-cash item and will not affect dividend payment at all. It still plans a 60%-80% dividend payout ratio.
Investors will have to follow the story to see how its general insurance and banking can take up the slack of life insurance. The company has no plans to sell the insurance business. Recently, Insurance Australia Group Limited (ASX: IAG) agreed to acquire the insurance businesses of Wesfarmers Ltd (ASX: WES) at a time when financial service businesses are getting decent sale prices.
That may indicate the company believes it still has good future value. The company's share price may wither some from this, but Foolish readers could see this as a long-term opportunity when market sentiment is low.
