Cyclone Maria has cast a cloud over Suncorp Group Ltd's (ASX: SUN) financial performance targets for financial year 2015. The insurer and banker updated the market on damage claims and the financial impact on the company.
About 10,000 claims are expected across the company's brands such as Suncorp, AAMI, Apia, GIO and Vero. Cost projections are $120 million – $150 million pre-tax (net of the 30% proportional quota share arrangement covering the Queensland home portfolio).
Following the Brisbane hail storm in the first half of financial year 2015, Suncorp told the market a $595 million allowance for events in financial year 2015 was in place. However, with the new cyclone damage included, Suncorp now estimates natural hazard expenses to be around $690 million – $720 million.
Changes to full-year outlook
In early February, Suncorp said in its half-year results presentation that its FY 2015 targeted return on equity was at least 10%. Now that is looking a little more uncertain. Suncorp announced a 15% half-year net profit increase as well as an 8.6% bigger interim dividend this month. For the market, the company may have a cloud hanging over its full-year earnings expectations, but not for Foolish investors.
The nature of insurance and investing
Major insurers Suncorp, Insurance Australia Group Ltd (ASX: IAG), QBE Insurance Group Ltd (ASX: QBE) and AMP Limited (ASX: AMP) all have provisions for natural disasters because they always occur. It's part of the insurance industry, so investors shouldn't be scared out of their stock holdings. The years 2010 and 2011 were particularly heavy for natural disasters, but other years were less than the average, for example.
Insurance premiums rise to reflect the cost of offering insurance coverage, so insurance company revenues generally rise over time and can lead to improved earnings in the long-term.
Source: Suncorp Introduction to Suncorp presentation
That's why having a long-term view on investing is essential. Suncorp is financially strong with surplus capital. It's currently running a simplification program, which is expected to generate savings of around $265 million by 2016, so there is more of a buffer for earnings as well.
Since Suncorp's fundamentals are sound and the stock story is improving, it's probably better to stick with the stock. Simply add to the position when temporary weaknesses appear and improve your potential long-term rate of return. Currently, the stock is offering a whopping 6.0% fully franked yield, which would be attractive to term deposit savers facing smaller rates of return.
