Suncorp Group (ASX: SUN) has increased net profit after tax (NPAT) for the half year to December 2012 by 47.6% to $574 million with its general insurance division the stand-out performer as the insurer pushed through higher premiums in response to the catastrophic weather events endured recently.
Investors could be forgiven for having expected a bruised and battered result from the Queensland-exposed Suncorp. In reality, the results to December are impressive, with costs associated with Cyclone Oswald and other weather events actually occurring post December 2012. On current estimates Suncorp expects Cyclone Oswald to result in net claims of around $200 million.
Pleasingly, the board raised the dividend by 25% on the previous corresponding period to 25 cents per share. Despite the increase, at a 52% payout ratio it is still below the payout target range. Suncorp has also improved its capital levels within the insurance division and within the banking division, while at the same time continuing to de-risk the balance sheet by shrinking the ‘non-core bank’, which dragged the NPAT results down by $143 million. CEO Patrick Snowball and his team have also been driving hard at delivering cost reductions across the group; one-off project costs amounting to $275 million are expected to flow through to annualised savings of $200 million from the 2016 financial year.
With fellow insurers AMP Limited (ASX: AMP), Insurance Australia Group (ASX: IAG), and QBE Insurance (ASX: QBE) due to report in the coming week, it’s possible we could see dividend increases as a theme emerging across the sector.
Like food and healthcare, insurance is a necessity, which helps to ‘recession proof’ insurance companies. Their businesses, however, are complicated and require detailed analysis to understand and value. Warren Buffett, who is often described as the world’s greatest investor (and I wholeheartedly agree!), is famous for investing in insurance companies. However, this doesn’t mean insurance companies are right for every investor and it should be noted that Buffett has been very selective and only owns a small handful of insurers.
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