SUN is Australia´s largest domestic general insurer and has a large regional banking franchise in Queensland. It also operates a life insurance business.
The main drivers are the domestic insurance and banking cycles, efficiencies and performance improvements.
General insurance is a high-risk business and investors should limit their exposure. Large insured events occur without warning and SUN lacks geographic diversification.
Reinsurance protection mitigates the risk to some extent and management has reduced earnings volatility further by selecting better risks and pricing more profitably.
The capital position is very strong.
Other key risks relate to the effects of competition on revenue growth and margins in risk underwriting, levels of reserve releases from long-tail lines, life insurance lapses and claims experience, bank bad debts, the rate of runoff of the non-core bank, and the ability of the core bank to grow.
Like all insurance companies they were looking for a half-year when natural hazard claims were less than the allowances and then Melbourne suffered a hailstorm on Christmas Day.
This will cost around $170 million above re-insurance, which will result in a downgrade from the forecast margins for the full year 2012 from 12.4% to 9.9%.
We also expect to see a drop in the net result, which reduces our value on this stock to $8.40.
The stock is currently trading at $8.15 but I suspect that we will see further price weakness as results are announced in the coming months.
I continue to hold SUN for long-term investors with the view to add on weakness.
The yield is still around 7% and a special dividend to distribute surplus capital and franking credits can be expected once the markets calm down.
For investors who are concerned about volatility the current strength in the price up from its lows of April 2011 may provide an opportunity to exit the stock.
For more information on Suncorp (SUN) please contact us on 07 4771 4577.