Suncorp margin hit by Disasters

Suncorp plans to squeeze its insurance policy holders for more cash, after a $4 billion “record run” of natural disasters conspired with a weaker Australian dollar to push up the cost for building parts, forcing the company to forecast a weaker first-half general insurance margin.

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The warning from chief executive Michael Cameron, who took charge of the insurer only in October, sent Suncorp stock tumbling to a two-and-a-half year low, wiping more than $1.5 billion off the insurer’s market cap in a contagion which quickly spread to rivals Insurance Australia Group and QBE.

Suncorp said its underlying insurance trading ratio — a key measure of profitability — would fall to 10 per cent for the half year through December, down from last financial year’s ratio of 14.7 per cent and missing the company’s 12 per cent goal.

Suncorp shares dropped as much as 10.3 per cent after the opening of trade to $11.71, their lowest since February last year. By 2pm (AEDT), the stock was down 8.6 per cent at $11.92. IAG stock had slumped 3 per cent while QBE retreated 3.3 per cent.

The warning comes amid increasing competitive in the local insurance industry, as dominant companies Suncorp and IAG face disruption from players such as Youi and Budget Direct.

A string of wild weather events on the east coast of Australia over the last year, such as Tropical Cyclone Marcia, Brisbane hail storms, and rain and floods which battered NSW’s Central Coast in April, had increased demand for repair parts, while home renovation has also added to supply constraints.

“When you put that together with increased volumes of construction of residential, you end up with very low supply and as a result the builders have got an amazing level of leverage for doing fairly straightforward repairs,” Mr Cameron said.

Adding in the effect of a weaker Australian dollar, Mr Cameron said the insurer has seen costs increase 17 per cent on its $500 million parts procurement program in the last couple of years. To complicate matters, low interest rates and excessive volatility in financial markets have hampered returns on Suncorp’s investments.

“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,” Mr Cameron said. “These increased costs will have a significant impact on the underlying margin in our personal insurance business,” he said.

“I’d be surprised if the rest of the industry wasn’t seeing some sort of price inflation on claims,” Mr Cameron said.

But CLSA analyst Jan van der Schalk disagreed. “[Suncorp] have a total, utter and complete interest in talking their issues up as affecting the entire market,” he said.

Mr van der Schalk said Suncorp was going to have to work hard to pull its luck around, facing “a recipe of disaster” of growing claims from its commercial and compulsory-third-party insurance lines.

Suncorp personal Insurance head Gary Dransfield said Suncorp, which controls brands such as AAMI, Apia and GIO, would continue to tighten prices on its insurance premiums, likely at the cost of market share.

“Our challenge and opportunity is to balance the restoration of the margin back to 12 per cent and take what we can get in terms of volume along the way,” Mr Dransfield said. “We expect financial benefits to flow through this year and the next.”

Tightened prices could hurt Suncorp’s market position at a time when the insurer is vulnerable from a fierce pricing war. Credit Suisse analyst Andrew Adams believes new competitors have skimmed about 2 per cent off IAG and Suncorp’s personal insurance portfolios.

Mr Cameron, who joined Suncorp from GPT Group, said the insurer was in good shape despite the short-term challenges, with $170m worth of savings to be delivered by 2018 through the group’s optimisation program.

“I’m confident we can address these challenges and continue to drive changes that improve outcomes for our customers, shareholders and other key stakeholders,” he said.

Mr Cameron declined to provide profit guidance for the firm, but said he would update the market if earnings were to fall 10 to 15 per cent below consensus, in line with legal requirements.