The Suncorp Group Ltd (ASX: SUN) share price rose 6% to $15.94 today after releasing its annual results. Here's what you need to know:
- Gross written premium (Suncorp is predominantly an insurer) rose 0.3% to $8,137 million
- Insurance profit was up 2.2% to $739 million
- Overall group underlying ("cash") profit was down 4.1% to $1,098 million
- Diluted earnings per share of 80.54 cents
- Dividends per share of 73 cents per share, plus another 8 cents in special dividends
- Announced sale of the Life Insurance division
- Cash Return On Equity (Cash ROE) of 8%
- Outlook targeting Cash ROE of 10% in 2019 and expecting to report 3%-5% revenue growth while costs remain controlled
So what?
It was a strong year for Suncorp with signs that the insurance market is starting to improve with pricing and volume improving – especially in New Zealand. Banking and finance performance was mediocre, but that may be par for the course given what we saw in the Commonwealth Bank of Australia (ASX: CBA) results yesterday.
Suncorp also struck a preliminary agreement to sell its life insurance business while retaining a 20-year agreement to distribute policies for the acquirer, if the deal goes through.
While banking profits fell, Suncorp reported above-market rates of growth in lending and deposits, and with below-average levels of loan impairments (bad loans). Approximately 18% of Suncorp's loans currently are interest-only, compared to above 20% at most of the Big 4.
Of Suncorp's new loans written during the year, approximately 22% were interest-only. 49% of Suncorp home loans, 71% of commercial loans, and 63% of all its agriculture loans are in Queensland, making Suncorp more exposed than average to the Sunshine State.
On the plus side this could also indicate greater resilience in some ways, given that the greatest increases in house prices have been in Sydney and Melbourne in recent years.
Now what?
The outlook for Suncorp is interesting, especially if the company is able to deliver on its 10% Cash ROE target next year, as this essentially implies a 25% improvement in underlying profit. With insurance industry pricing picking up and Suncorp implementing several new strategies such as a "zero touch" digital claims process, the company could be set for a strong 2019.
Unfortunately much of this is already priced in to Suncorp's shares, and I don't think it is a stand-out bargain today. I would call it a hold.
