The Suncorp Group Ltd (ASX: SUN) share price is pushing higher following the release of a trading update.
At the time of writing, the insurance and banking giant's shares are up 1% to $9.26.
What was in the Suncorp update?
This morning Suncorp provided an update on the expected impacts of COVID-19 on its General Insurance and Banking businesses and the APRA September quarter General Insurance statistics.
In respect to COVID-19, the impact on Suncorp's General Insurance portfolio for the first half of FY 2021 is expected to be broadly neutral. Management notes that potential business interruption (BI) claims and premium waivers have been largely offset by reductions in motor claims.
In respect to its BI claims, management remains confident the intention of its BI policies is clear and that policies do not respond to pandemics.
Nevertheless, due to its prudent approach to provisioning, the company's BI provisioning is sufficient to cover claims costs in 90% of possible outcomes. This includes in the event of an unfavourable judgement for the Insurance Council of Australia BI industry test case.
Taking into account the breadth and depth of the second Victorian lockdown, the company now expects to recognise a further $125 million (pre-tax) provision for potential BI claims. This will take its total provision for potential BI claims in relation to COVID-19 to $195 million (pre-tax).
Suncorp Bank.
Moving to its banking business. Management advised that Suncorp Bank's credit quality remains strong, with total impairment losses of $3 million for the September quarter.
At the end of September, Suncorp Bank had $3 billion of loans under temporary loan deferral arrangements. This represents 4% of its housing portfolio and 7.6% of its SME portfolio.
APRA September 2020 Quarterly General Insurance Statistics.
The company notes that on 26 November, the Australian Prudential Regulation Authority (APRA) will publish institution-level financial statistics for the general insurance industry. This is based on regulatory filings for the quarter ended September 2020 and includes statistics for its AAI business.
Management has highlighted that the APRA statistics do not include the impact to the profit and loss statement of several key adjustments, particularly the valuation of its long tail insurance portfolio which is conducted on a half yearly basis and included in Suncorp's regular financial disclosures.
Included within the regulatory filing are the results of AAI's Liability Adequacy Test (LAT) for the September quarter. The LAT is undertaken to test whether unearned premium liabilities on the balance sheet are sufficient to cover the cost of expected future claims.
The company advised that there is significant seasonality in its LAT calculation, with premiums earned on a straight-line basis, while future claims reflect the seasonality of natural hazards. Furthermore, the September quarter is typically the weakest LAT outcome, with the company exposed to the upcoming summer season.
In light of this, a deficit of $173 million will be revealed, but this is expected to have substantially unwound by 31 December 2020, and to be profit neutral for FY 2021. In other words, investors need not panic over AAI's weak numbers in APRA's update.
