For the past month or so, the S&P/ASX 200 Index (ASX: XJO) (Index: ^AXJO) has been up and down. February's reporting season was relatively good, and the market's anticipation for more interest rate cuts is a positive.
For insurance companies, the market is still working out how much the recent hail storm and cyclone damage in Queensland is going to impact full-year revenue and earnings for financial year 2015.
Suncorp Group Ltd (ASX: SUN), which is based in Queensland, has the most exposure to damage claims, but general insurer Insurance Australia Group Ltd (ASX: IAG) has reported on its own potential claims.
Although some investors may have cooled towards Suncorp Group, I think there are three reasons to stick with the insurer and banker.
1) The strong and growing dividend: Suncorp pays a 6.0% yield fully franked, which becomes a grossed up 8.5% yield. The interim dividend was raised for the fourth year in a row, from 35 cents per share to 38 cps. There is also a chance that Suncorp will declare a special dividend along with the final dividend later this financial year like it has in the past four years. Dividend investors will like that very much.
2) Improved life insurance performance: Last year, Suncorp told shareholders that the life insurance division will be subdued for the next several years. That concerned the market. The life insurance business generates only about 13% of total revenue, so increases in Suncorp banking and the much larger general insurance divisions can more than offset that weakness. In the interim report, life insurance did see solid growth in half-year segment earnings. While investors fret, the situation gets better.
3) Cost cutting and better service provision: The current simplification program is on track to deliver $225 million in cost savings in this financial year. Some of that is being used to upgrade computer systems and move more data management to cloud applications. This can achieve more efficiencies in operations to keep costs down and improve customer service and price competition. There are further benefits to look forward to in financial year 2016 as well.
