La Niña fallout creates stormy half-year earnings report for Suncorp

Suncorp Group (ASX: SUN) today announced a cut to its interim dividend amid a fall in profits and revenue during the first half of the 2022 financial year.

Cash profits for 1H22 dropped 29.1 per cent to $361 million, compared against December 2020 figures, while net profit after tax slumped 20.8 per cent to $388 million over the same period.

The Brisbane-based ASX-listed company indicated rising natural hazard claims costs linked to the La Niña weather pattern as the reason behind the fall in profits, which ran $205 million above the predicted allowance for the first six months,

“While we have been challenged by the La Niña climate pattern and the operational impacts of COVID-19, we continue to deliver against our strategic priorities and have good momentum as we move into the second half of FY22,” Group CEO Steve Johnston said.

“I am particularly proud of how we have supported our customers and communities during this time.

“Despite the many challenges of COVID-19, our teams have mobilised quickly to get our customers back to their feet.”

Hazard claims during 1H22 cost an estimated $695 million, as the group received more than 50,000 claims from 19 declared separate events.

Of the total claims, 60.7 per cent were against the home and 29.7 per cent against motor vehicles. The top five locations where claims originated were Victoria (33 per cent), NSW (24.8 per cent), SA (15.7 per cent), QLD (13.5 per cent) and WA (4.45 per cent).

The top five causes of the claims were hail (37 per cent), wind (19 per cent), rain (17 per cent), earthquake (8 per cent) and lightning (4 per cent).

In response, the Australian government has introduced legislation to establish a reinsurance pool for cyclone activity in Northern Australia.

There is a symbiotic relationship between the costs related to claims and insurance revenue, as reflected by Suncorp’s home insurance portfolio growing by 8.3 per cent, which has been impacted by the ongoing response to higher natural hazards and reinsurance costs.  

The group reported that the underlying yield on insurance funds was 94 basis points, approximately 53bps above risk-free, reflecting the current environment of tight credit spreads and improved ILB (index-linked bond) carry and positive manager performances.

While the flagship insurance division suffered from costs related to claims, the banking arm of the division reported a 5 per cent increase in profit after tax to $200 million, contributing to over half of the group’s profit for 1H22.

Digital account openings increased by 20 per cent, while growth in everyday banking was up 12.8 per cent in the half.

The group’s strategy remains focused on winning the home lending market, and the rise in profit reflects growth in loan balances and a net impairment release.

“Looking ahead, we are continuing to target operating expenses of around $2.7 billion in FY23,” group chief financial officer Jeremy Robson said.

“The key dynamics here are: firstly, efficiencies from the delivery of our strategic initiatives, which include the acceleration of digital adoption and self-service, contact centre automation, and improved productivity.

“Secondly, project costs are expected to reduce in FY23, as the recently elevated Royal Commission related regulatory spend and our strategic program of work are delivered.”

Suncorp’s 1H22 results mark the end of the first year of a three-year plan outlined to the markets in 1H21 around commitments to deliver for FY23. The strategy remains to simplify its portfolio of assets and products to enable management to drive improved performance in the core businesses.

“This progress has been achieved against the backdrop of COVID and its associated personal and professional challenges,” Johnston said.  

“To have navigated COVID, 50,000 natural hazard claims, big technology deliverables, and a once in a generation regulatory overhaul is a testament to the resilience of our team.”

Suncorp will pay a dividend of $0.23 a share, down from an interim payment of $0.26 last year.

Shares in Suncorp (ASX: SUN) rose 5.18 per cent, as of 11.30 am AEDT, on the back of the published half-yearly results.