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Time to buy Suncorp?

Patrick Snowball, CEO of finance and insurance conglomerate Suncorp Group (ASX: SUN), has declared his company’s intentions to simplify and lower costs, whilst also doubling its return on equity by 2015 – a goal which would be made more achievable with the sale of the group’s “bad bank”.

Speaking at the group’s annual strategy day, Mr. Snowball indicated that after being confronted by a ‘sub-optimal balance sheet’ upon his arrival at the company in 2009, the company now has the opportunity to rid itself of underperforming non-core assets which have been restricting the group’s earning capacity, stating that there is still ‘a lot more gas in the tank’ for Suncorp.

Bank of America Merrill Lynch believes that a sale of the non-core bank, which the market expects to be sooner rather than later, would lift earnings per share by 15% next year, which would also allow for an increase in dividends paid out to shareholders. There have been suggestions that a special dividend worth 10-15c per share could also be on the cards, which would see it follow suit with other large corporations such as Graincorp (ASX: GNC) to attract investors through a special offering.

Furthermore, aiming for an average growth of 7-9% per annum for the next two years, Mr. Snowball also gave details regarding the group’s simplification program, which is expected to produce benefits of $225 million in the 2015 financial year, and $265 million in 2016 – beating previous expectations of $200 million by 2016.

Following the announcement, Suncorp’s target price was increased by 9.4% to $12.80. With a P/E ratio of 15, this company is well worth investors’ consideration – particularly those who want to take advantage of a possible special dividend payout.

Foolish takeaway

Whilst the insurance industry has been hit with enormous claims and costs, investors have been presented with the opportunity to pick up quality businesses on the cheap. However, investors are also wise to monitor the management behind each of those companies to ensure long-term sustainability and long-term investment gains.

Suncorp’s competitor QBE Insurance Group (ASX: QBE) fits this description. Although its shares have made significant gains in the last six months, a decreasing number of natural disasters and the falling Australian dollar should see shares climb higher.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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