Suncorp dividend hit by wild weather as profit falls

The insurance giant has cut its dividend to the lowest since 2014 after first-half profit was hit from higher claims costs from natural hazards and lower market returns.

Suncorp, led by Steve Johnston, has cut its dividend to the lowest since 2014 after first-half profit was hit from rising claims costs and lower market returns.

Rain, hail, and a 21 per cent fall in first half profits have done little to dent the optimism of investors, after Suncorp exceeded expectations in its latest update.

This comes after the sunshine state’s signature financial player was dealt a messy six months of natural catastrophes coupled with lower investments returns.

But Suncorp’s banking arm, often playing second fiddle to the crowded stable of insurance brands of the business, showed its worth, notching up more than half the total $388m first half profits.

This was down on Suncorp’s $490m return from the same time last year.

The dreary profits in the first half saw Suncorp’s dividend payouts slip to their lowest since 2014, with investors handed just 23c per share.

This comes after an on-market $250m buyback boosted earnings per share by 1.6 per cent and a string of price rises across Suncorp policies.

But investors welcome the news, with shares rising 5.9 per cent to close at $12.08 in a stronger market.

Suncorp chief executive Steve Johnston said despite the wild weather and impact from the pandemic, the business was well placed to “continue to deliver against our strategic priorities and have good momentum as we move into the second half of FY22.”

However, Mr Johnston noted the string of natural catastrophes that had cost the insurer dearly.

Suncorp said 19 separate weather events and more than 50,000 natural hazard claims cost the business $695m to cover damages.

This was $205m more than Suncorp had budgeted for the first half of the financial year and comes with warnings of more to come.

In November, Suncorp increased its natural hazard allowance, upgrading it from $980m to between $1.1bn to 1.13bn.

“As we approach the federal election, I am pleased we have already seen the issue of disaster resilience receive more consideration,” he said.

“While we must tackle the underlying risk of natural hazards through targeted infrastructure, we can‘t continue to ignore other factors driving affordability pressures in high-risk regions.”

Suncorp customer deposits grew by 7.8 per cent over the half to $44.8bn but net interest margin fell 12 bps from the previous six months to 1.97 per cent.

The rising natural catastrophe costs came as Suncorp expanded its insurance business, with 7.5 per cent more gross written premium in the half, excluding portfolio exits, to $4.47bn.

Rising ad-on options for insurance products were pointed to by Suncorp as supporting premium growth.

Suncorp also saw a lift in digital sales, now accounting for 60 per cent of all products sold by the insurer, in a move set to expand to other lines.

The group was not stung by major inflationary pressures that are looming for many insurers.

Fellow listed insurer IAG noted in December it was planning for an inflationary future and feeling inflationary pressure in its motor lines.

In a bid to head off creeping inflation, Suncorp has swung into action, setting up new panels of approved repairers, establishing its own materials storages, and closely scrutinising bills.

Mr Johnston said Suncorp had actually seen “negative inflation” across its home portfolio on the back of its close management of the process.

But despite all this the core insurance business was the standout laggard, with after tax profits falling 55.8 per cent to $114m.

That’s compared to Suncorps’ banking business, where profit after tax lifted 5.3 per cent to $200m.

Mr Johnston said it was now clear the Suncorp bank’s role had not been “understood”.

“This is an example of the diversification of earnings and the diversification of revenue,” he said.

The $200m profits from the banking business account for more than half Suncorp’s total cash earnings.

The rising tide of Australian home lending saw Suncorp lift its home lending by 5.3 per cent over the half.

But the intense competition to snap up prospective borrowers saw Suncorps’ net interest margin fall by 12 basis points to 1.97 per cent.

This came at the same time the bank lifted its deposits, growing 7.8 per cent over the half to $44.8bn.

Suncorp noted the strong lift in its banking business showed “good progress on its key strategic initiative to win in home lending”.

This comes at the same time as ANZ warned on Monday its margins were being crunched, with an 8 basis point contraction to a net interest margin of just 1.57 per cent.

Suncorp noted it had released a $16m net impairment, reflecting a $15m reduction in the collective provision in economic conditions since the outbreak of Covid-19.

Mr Johnston may also have better news when the company announces its full year results, with almost $190m provisioned to cover pandemic losses for business interruption insurance likely to be unwound in the result the industry wins its court tussle.

He said 2022 would be a “critical” year for the group as it set about delivering its 2023 plans.

“We have momentum across our three businesses and our focus is on continued execution to ensure we hit our targets,” Mr Johnston said.

“The work we have done over the last couple of years – digitising, rejuvenating brands, investing in underwriting systems and best in class claims – is starting to pay off and is behind the improvements in the business’ underlying strength.”