Why the Suncorp Group Ltd share price fell 6% today

The Suncorp Group Ltd (ASX:SUN) share price fell 6% to $13.63 this morning.

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The Suncorp Group Ltd (ASX: SUN) share price fell 6% to $13.63 this morning, after the company released its full year results. Here's what you need to know:

  • Revenues rose 12% to $17.4 billion
  • Profit rose 4% to $1.07 billion
  • Dividends of 73 cents up from 68 cents previously
  • Insurance gross written premium (GWP) up by 4%
  • Cash return on equity (ROE) of 8.4% (up from 8.2%)
  • Net tangible assets of $6.20 per share
  • To invest $100 million in the 'Marketplace' strategy; dividends were maintained by lifting payout ratio

So What?

Suncorp is approximately half insurer and half bank, although thanks to lower claim costs this year, the insurance division delivered nearly 2/3rds of overall profits. The core Australian insurance division was a very strong performer, with respectable premium growth and lower losses which lead to a significant increase in profits.

New Zealand was more subdued, due to the impact of the Kaikoura earthquake and the ongoing Canterbury insurance claims. Suncorp also had its bid for NZ minnow Tower Limited (Australia) (ASX: TWR) rejected by the NZ competition regulator.

In the banking division, business was more ordinary. Net interest margins (NIMs; the 'spread' between what is paid for funds and the rate the bank loans money at) came in at 1.83%, down from 1.86% previously. Impairments (losses on loans) also fell from 0.03% to 0.01%, a phenomenally low level. By contrast, this was 0.09% in 2012, 1.28% in 2009, and 0.26% in 2006. Surprisingly, net interest margins have remained relatively constant since 2009, despite plunging interest rates.

Now What?

Over the next few years, Suncorp is investing in its Marketplace, a customer-centric strategy that is one of the ways that CEO Michael Cameron is aiming to lift total group return on equity to 10% (8.4% currently). Importantly, the banking part of Suncorp already generates a greater than 12% return on equity, so it is the insurance division that needs to lift its game.

On that front I am not optimistic, as I believe the Australian insurance industry remains highly competitive. My perception is that it's also hard for a major general insurer like Suncorp to focus on writing more profitable insurance, since by definition they cover a wide range of customers and situations. Suncorp is a good company, but it looks fully priced to me and I'm just not excited about it today.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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