Suncorp Group (SUN) is one of the largest general insurance groups in Australia, and one of the biggest regional banks in Queensland.
The group’s services span banking, insurance, investment and superannuation whilst its focus is primarily on retail customers and small to medium businesses.
The insurance industry has had to contend with a number of natural disasters since 2010, the latest of which was the recent flooding in VIC and NSW.
SUN’s exposure to the flooding has yet to be fully determined, creating uncertainty that may pressure its share price in the near-term.
This week SUN admitted it had received hundreds of claims related to the flooding in VIC and NSW.
SUN declined to give an estimate of the final number of claims it will eventually receive, as well the potential cost to the company.
Not helping matters today was the Insurance Council, which said that although less than 4000 claims had been received so far, the number was expected to rise in coming days.
Considering SUN derives a significant bulk of its insurance business from VIC and NSW, the odds are its profitability will be hit by the increased number of claims.
SUN’s 2012 term funding requirements of approximately $2 billion were expected to be sourced via covered bonds, senior unsecured debt or the Residential Mortgage Backed Securities (RMBS) markets.
The European debt crisis has driven up the cost of wholesale funding for the bigger banks. However higher wholesale costs also have ramifications for SUN’s preferred funding sources.
Faced with higher wholesale funding expenses, financial institutions are likely to compete more aggressively for funds in the RMBS and covered bond markets.
This means for companies like SUN, they will be forced to pay even more for funding, thus heaping further pressure on their margins.
Positive longer term
In late February, SUN reported a 74% year-on-year surge in 1H12 net profit to $389 million. An interim dividend of 20 cents was declared.
The profit was built primarily on the Suncorp Life business, which more than doubled its net profit and recorded an 8% lift in revenue.
There was top line growth across all business lines, whilst the company’s $1.2 billion in surplus capital not only provides it with a buffer against economic uncertainty but also gives it flexibility to bump up dividends and/or announce a share buyback.
Although SUN still has appeal as a longer-term investment, short-term storm clouds may be gathering on the horizon.
Insurers appear to be getting hit constantly by natural disasters, and the latest flooding in VIC/NSW raises concerns over the impact to insurance profitability.
SUN has already faced a spike in the number of flood-related claims, and there is still no word on the impact to its own profitability.
Moreover, the European debt crisis has driven up funding costs for many financial institutions, threatening to squeeze SUN’s margins.
So whilst the longer-term story for SUN remains sound, we at Australian Stock Report feel recent headwinds will continue to dog its share price in the near-term.