Here’s why the Suncorp Group Ltd and Insurance Australia Group Ltd share prices are tanking

The Suncorp Group Ltd (ASX: SUN) and Insurance Australia Group Ltd (ASX: IAG) share prices are tanking.

In fact, Suncorp, IAG and rival QBE Insurance Group Ltd (ASX: QBE) have fallen 8.6%, 2.9% and 2.8%, respectively, on the back of a trading update from Suncorp this morning.

In an announcement to the ASX, Suncorp said last year’s record run of natural weather events and the lower Australian dollar would impact general insurance profit margins.

“While the industry remains very competitive, costs have been increasing as a result of the lower Australian dollar and the impact of the $4 billion of weather events during 2015,” CEO Michael Cameron said. “These increased costs will have a significant impact on the underlying margin in our Personal Insurance business.”

Suncorp’s underlying Insurance Trading Ratio (ITR) has been impacted by a $75 million increase in natural hazards allowance, large loss experience in Commercial insurance, lower investment yields and increased claims frequency in New South Wales. The insurer expects to report an ITR (a measure of insurance and investment profitability) of 10%, down from 11.4% last year.

However, Mr Cameron said the outlook for premium revenue growth within general insurance is positive and the company would buck the recent trend of falling or flat gross written premium (GWP) to post GWP growth in the six months to 31 December 2015. In addition, Mr Cameron said reported profits would continue to benefit from, “long-tail portfolios, which remain well above long-run expectations.”

“The Group is in good shape other than the short-term operational challenges in General Insurance that we are highlighting today,” he added. Suncorp expects to release its half-year results in February and will announce a dividend based on its target payout ratio of 60% to 80% of cash earnings.

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Motley Fool writer/analyst Owen Raszkiewicz has no position in any stocks mentioned.

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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