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Suncorp told to lose its ‘bad bank’

Queensland-based insurance and banking provider Suncorp Group (ASX: SUN) has just released the quarterly financial update on its subsidiary Suncorp Bank. According to a report in The Australian newspaper, the quarterly results have been met with “calls by analysts to consider offloading its non-core ‘bad bank’”.

The ‘bad bank’ refers to a structure set up in 2009 to house around $17.5 billion in troubled loans that were on the books. These troubled loans were effectively separated from the main insurance and banking operations to be allowed to decline, or ‘run-off’ to use industry jargon. The announcement stated that impairment losses from the run-off book were $58 million for the quarter; causing analysts to suggest it would be better for Suncorp to sell the ‘bad bank’ altogether.

While management and some analysts may have different views over how to handle the non-core division, the rest of Suncorp Bank appears to be tracking well. A highlight was total lending, which was up 2% to $46.7 billion, helped along by an increase in the number of transaction accounts and an increase in customer penetration.

Suncorp also took the opportunity to update the market on the state of natural hazard claims. Over the nine months to 31 March the general insurance division took a hit with claims reaching $537 million against an allowance of $520 million. This was largely due to the damage caused by ex-Tropical Cyclone Oswald which is currently estimated at a staggering $250 million in claims to Suncorp. The weather events certainly haven’t damaged the share price growth of the domestic insurers, with market-beating returns from the domestic-focussed insurers over the past 12 months. Suncorp, Insurance Australia Group (ASX: IAG) and AMP (ASX: AMP) have all significantly outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) as displayed in the chart below. Meanwhile the share prices of New Zealand based insurer Tower (ASX: TWR) and global insurer QBE Insurance (ASX: QBE) have both underperformed.

tmchart

Source: Google Finance

Foolish takeaway

People will always need insurance, however to make money as a long-term investor in the insurance industry requires identifying management teams who are keenly focussed on the risks they take on.

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More reading

The Motley Fool’s purpose is to help the world invest, better.  Click here now  for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Tim McArthur owns shares in QBE Insurance.

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