Suncorp Group Ltd’s $500 million write-down: what investors need to know

Insurer and banking service provider Suncorp Group Ltd (ASX: SUN) is streamlining its business to cut costs and simplify its structure and has seen some progress in stronger first-half earnings and a rising share price. However, there will still be bumps along the road to a stronger financial position.

What: The company announced a $500 million write-down in assets in a market update, sending the share price down as much as 3% in mid-day trading. Before today, the stock was close to setting a new 52-week high.

Now What: What does this mean for the company and its outlook?

Earnings: It will not affect the group earnings and dividends, although it will have an impact on reported net profit after tax for the 2014 financial year. The $500 million is a non-cash item for intangible assets connected to goodwill and loss recognition on some products and reserving adjustments.

Capital surplus: The write-down will have a minimal impact of $27 million on capital surplus. The company has been accumulating excess capital and currently total capital is about $1.5 billion above its operating targets. This shows the foresight the company has in strengthening its balance sheet.

Banking: The banking division update showed growth in its core markets of home and agribusiness. Small business lending was up 1.1% for the latest quarter. In the first half, the banking division had a great improvement in earnings thanks to restructuring of its loan books.

Outlook: FY 2015 growth targets were reduced to between 4% and 6%, down from 7% and 9%. This reflects market conditions that include a lower natural hazard environment in Australia and an expected reduction in reinsurance premiums.  The weather climate has been relatively benign, resulting in lower natural hazard claims for general insurance.

Suncorp reaffirmed its expectation of about $225 million in benefits from its simplification program in FY 2015 and a further $265 million in FY 2016.

It is committed to a dividend payout ratio of 60% – 80% of cash earnings.

Other insurance companies like Insurance Australia Group Limited (ASX: IAG) and QBE Insurance Group Ltd (ASX: QBE) are also restructuring after several years of high natural disasters and heavy costs, so the whole industry is belt tightening and simplifying.  Investors sometimes can use this to their advantage by owning positions in companies on the road to recovery before the final results and improved earnings are achieved.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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