Suncorp (ASX:SUN) share price drops as insurance sale completes

Suncorp shares are dropping amid the sale of its RACT Insurance business.

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The Suncorp Group Ltd (ASX: SUN) share price is currently down as the company completes the sale of one of its insurance businesses. The S&P/ASX 200 Index (ASX: XJO) is currently down around 0.4%.

What has Suncorp sold?

Suncorp told the market that it has completed the sale of its 50% interest in RACT Insurance to its joint venture partner, the Royal Automobile Club of Tasmania Ltd (RACT), which was announced at the start of July 2021.

The sale was for a cash consideration of $83.75 million and is part of the continued simplification of the business.

Suncorp disclosed that the pre-tax profit on sale is $65 million, with the total capital release as a result of the transaction being $55 million. The $65 million pre-tax profit was at the low end of its guidance of between $65 million to $70 million. However, the total capital release was only expected to be approximately $50 million.

At the time of the sale, Suncorp’s CEO Steve Johnston said that the transaction was in the best interests of customers, shareholders and the business.

Mr Johnston said:

Suncorp and RACT have enjoyed a successful relationship in Tasmania since 2007. We have mutually agreed that now is the right time for RACT to take full control of the insurance entity. This is consistent with our focus on simplifying the group and driving improvement in our core insurance and banking businesses.

Tasmania remains an important market for Suncorp Group. We are now focused on driving growth in the region through our wholly owned brands. This includes our leading national mass market brand AAMI, as well as our more specialised brands Shannons and APIA.

Suncorp has also said that the divestments of RACT Insurance and its wealth business make strategic sense.

What is the company doing with its capital?

In FY21, as a result of the company’s “strong” balance sheet and confidence in the outlook, the board declared a fully franked final dividend of $0.40 per share, a $0.08 per share fully franked special dividend and announced an on-market share buyback of up to $250 million.

The total FY21 ordinary dividend of $0.66 per share represents a trailing grossed-up dividend yield of 8.7% at the current Suncorp share price.

It also said that it will continue to maintain its prudent capital management strategy, including an appropriate buffer. It is maintaining its commitment to a dividend payout ratio of between 60% to 80%.

It’s also committed to returning to shareholders with any capital that is excess to the needs of the business.

Suncorp share price snapshot and outlook

With the Suncorp share price currently down, it has now dropped 8% over the last month.

In FY22, it’s focused on driving improved momentum in the core business, in order to meet its FY23 plan to deliver a growing business with a sustainable return on equity that’s above the cost of equity.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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