Company Overview - Suncorp Group Limited is engaged in the provision of general insurance, banking, life insurance, superannuation products and related services to the retail, corporate and commercial sectors in Australia and New Zealand. The Company's segments include Personal Insurance, which provides home and contents, motor, boat and travel insurance products; Commercial Insurance, which provides commercial motor, commercial property, marine, industrial special risks, loan protection insurance products and others; General Insurance New Zealand, which provides motor, marine, business, rural, travel insurance products and others; Bank, which provides personal and commercial banking, property and equipment finance, home, personal and small business loans and others; Life, which provides superannuation administration services, financial planning and funds administration services, and Corporate, which includes investment of the Company's capital, business strategy activities and its shared services.

SUN Details
Dealing with claims arising from natural hazards: Suncorp Group Ltd (ASX: SUN) had recently provided an update on the financial impact of natural hazard events, including the Sydney hailstorm, for the eight months to February 28, 2017. The group has responded to approximately 11,000 claims from the hailstorm on February 18, 2017 across its insurance brands including AAMI, GIO, Suncorp, Apia, Shannons and Bingle. The majority of claims are related to home and motor vehicle damage. The financial impact of the event is expected to be between $150 and $170 million. Overall, SUN’s total natural hazard claims costs for the eight months to February 2017 are estimated to be between $610 and $630 million. SUN is well protected against further natural hazard events. Apart from the main catastrophe program, SUN has an additional Natural Hazard Aggregate Protection in place for the 2017 financial year. This provides $300 million of cover once the retained portion of natural hazard events greater than $5 million exceed a total of $460 million to SUN. On February 28, 2017, events greater than $5 million are estimated to be between $420 and $440 million. Moreover, SUN has quickly established hail assessment centers at key locations along the storm path. These facilities in Wollongong, Bella Vista and Willoughby are assessing as many as 650 cars per day. The company is ensuring the safety of the customers and their families, as well as processing all claims as soon as possible. Suncorp has now advised customers in North Queensland to take all possible precautions in view of the approach of Cyclone Debbie while the group has said to be well protected against the financial impact of the cyclone. Claims costs are expected to be fully covered by Suncorp’s main catastrophe program and the additional Natural Hazard Aggregate Protection.
 
Intention to acquire stake in Tower: SUN and its affiliated companies acting through UBS, have approached shareholders seeking to initially buy up to a 19.99% stake in Tower at a fixed price of NZ$1.30 per share, with a view to escalating the offer to 100% of all shares. Moreover, SUN’s wholly owned subsidiary, Vero Insurance New Zealand Limited (Vero NZ), had successfully acquired 11.14% of the ordinary shares in Tower Limited in New Zealand. A non-binding indicative proposal has also been submitted to the Board of Tower outlining SUN's interest in acquiring the residual 88.86% of ordinary shares at a price of NZ$1.30 per share. The proposed acquisition of Tower will provide SUN an opportunity to strengthen Suncorp New Zealand’s strategic position in the highly competitive New Zealand insurance market. Moreover, the proposed acquisition would consolidate SUN’s position in the New Zealand general insurance market that will create a business with gross written premiums of NZ $1.6 billion. Although the offer is at an early stage, the combined business is expected to generate significant shareholder value through cost efficiencies, as well as reinsurance and technology synergies.
 
First half financial performance: SUN has reported the NPAT growth of 1.3% to $537 million in the first half year ended December 31, 2016, and the dividend grew 10% to 33 cents. The profit after tax from business lines has increased 12.7% to $613 million. The topline grew 4.3% and expenses remained flat. Moreover, the net assets of the SUN has increased to $13,652 million at December 31, 2016 from $13,570 million at June 30, 2016. The growth in the net assets of $82 million primarily arises from the total comprehensive income for the half-year, partially offset by the payment of the 2016 final dividend. During the half-year, AAI Limited (a subsidiary of SUN) has issued $330 million of Tier 2 subordinated notes and redeemed Tier 2 transitional subordinated notes at a face value of $98 million (regulatory capital value of $108 million). 

1H 17 Financial Performance (Source: Company Reports)
 
Capital position highlights: Suncorp which is represented by Suncorp-Metway Limited (SML) and its subsidiaries got approval from APRA for a Committed Liquidity Facility of $3.8 billion for the 2017 calendar year as compared to the $4.2 billion in the prior corresponding period. The group reported net cash outflows of $6,443 million in December 2016 mainly on the back of deposits and unsecured wholesale funding, which got offset by inflows from maturing loans. The daily average Liquidity Coverage Ratio (LCR) was 133.1% for the quarter ended December 31, 2016 which is on track as compared to the daily average LCR of 132.9% for the quarter ended September 30, 2016. This rise in daily average cash outflows is primarily on the back of the maturity profile of domestic wholesale liabilities comprising $1.1 billion of bond in December coupled with rise in obligations related to lending growth. On the other hand, the decrease in offshore short term wholesale maturities, with the decision to minimize maturities around US money market reforms has offset the rise to a certain extent. Meanwhile, the high-quality liquid assets held over the quarter rose which is on track with rising net cash outflow and expectation of the lower committed liquidity facility (CLF). 

Capital Position (Source: Company Reports)
 
Capital Notes Prospectus: Suncorp has now lodged a capital notes prospectus with the Australian Securities and Investments Commission (ASIC) to raise $250 million at $100 per Capital Note with the ability to raise more or less. The proceeds of the above are expected to be used for funding the capital needs of one or more Regulated Entities within the Suncorp Group.
 
Strategy Updates: The group has performed well against the three priorities of Maintaining Stability and Momentum, Elevating the Customer and Recalibrating Costs. The group also finished the organizational restructure with operating structures confirmed across all functions. The restructuring removed the constraints and is influencing behaviors to drive the customer strategy. During the half year, SUN has deepened its relationship with customers by launching white-labelled annuities and health insurance, Suncorp Start Company, Suncorp Business Toolbox, AAMI SmartPlates and a Life Insurance offering for Austbrokers advisors. Additionally, the group has opened the first Concept Store in Parramatta, which is opened seven days a week. The company implemented measures are restoring Suncorp’s consumer insurance claims management capability. In Motor, this includes improving SMART shop capacity utilization and motor assessment processes. In Home, resourcing and rigor around claims processing has been increased resulting in a reduction in the number of outstanding claims. Therefore, the loss ratios in both portfolios have improved.
 
Outlook: The group is expecting the margin growth in the future across its business portfolio. Moreover, the group’s major targets include broadening the customer relationships, flat cost base in FY17 and FY18, improving the underlying NPAT and looking for sustainable ROE of at least 10%, which implies an underlying Insurance Trading Ratio (ITR) of at least 12%. Moreover, insurance’s GWP growth, remediation of working claims and strong focus on claims management is expected to deliver an improvement in the underlying ITR in the second half. New Zealand’s pricing response to the Kaikoura earthquake will mitigate the impact of additional reinsurance reinstatement costs. Additionally, Suncorp Bank’s recent increase in mortgage rates, combined with less aggressive competitor behavior is expected to deliver an improved second half NIM. Life planned margins are expected to remain stable, however lapse and claims experience will continue to be impacted by volatile industry trends. The group continues to target a dividend payout of 60% to 80% of cash earnings.
 
Stock Performance: SUN stock price fell over 3.8% in the last three months (as of March 24, 2017) and lost over 4.6% in this year to date on concerns over the rising claims, but generated decent returns of over 11.2% in the last one year. The recent correction has placed SUN at reasonable levels. The group has now increased the level of transparency with regards to segregating higher return businesses from lower ones with New Zealand being depicted as a standalone business. SUN’s capital position, productivity initiatives and value-creating options along with a decent top line performance and outlook for general insurance and banking, give a positive indication of momentum going forward. Given the prospects and the ability to handle claims, we give a “Buy” recommendation on the stock at the current price of $13.00

 
SUN Daily Chart (Source: Thomson Reuters)

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