Suncorp Group says it’s confident that significant insurance premium rises will cover increased costs brought about by the worst year of natural disasters it has experienced.
The Brisbane-based insurer and regional bank also warns the Christchurch earthquakes are likely to change the way insurance is offered in New Zealand.
Suncorp managed more than 100,000 claims worth $4 billion in the year to June 30, relating to floods, Cyclone Yasi, New Zealand’s earthquakes and other natural disasters. Its costs from the claims were $325 million more than it had allowed for, and it paid an additional $232 million to top up its reinsurance cover. Those factors, and a drop in profit from its life insurance business, led to a 42 per cent fall in its annual net profit to $453 million.
Since the end of June, Suncorp has increased its allowance for claims by $40 million to $500 million, and negotiated new reinsurance cover that will cap its claims cost from a major natural disaster at $250 million.
But the cost of the new reinsurance cover is up $155 million from the previous year at $730 million.
Chief financial officer John Nesbitt said revenue from several premium hikes – 10 per cent in March 2010, a further 10 per cent in March this year and another four per cent in June – would most likely cover those costs and protect its insurance margins.
However, chief executive Patrick Snowball indicated there may not be room for further premium hikes if reinsurance costs continued to rise.
“We are probably getting to the point where the cost is really starting to make people sit up,” he told analysts. “We obviously have the flow through of the Queensland floods and people understanding the value of insurance, but I think we just have to be sensitive now.”
If reinsurance costs fall, perhaps due to benign storm season in the United States, Suncorp’s profits will rise and some relief could be passed on to customers, he added.
Suncorp shares gained 40 cents, or 5.6 per cent, to $7.59, with the net profit in line with market expectations and the cost of new reinsurance lower than some analysts had expected.
Suncorp’s bank posted strong results, with its after tax profit of $84 million up 91 per cent from the previous corresponding period.
Loans increased six per cent from the previous year and its net interest margin, a key driver of the bank’s profit, rose 10 basis points from a year earlier to 1.9 per cent. Bad debt expenses were stable despite the Queensland floods.
Suncorp’s New Zealand insurance operations posted a loss of $203 million in the year to June, and Mr Snowball said he expected changes to that industry because of the massive cost of the Christchurch earthquakes.
“I wouldn’t be surprised over the next year or so if we don’t see a complete change potentially in the way earthquakes are underwritten in New Zealand, and that will change how reinsurance is applied on everything going forward,” he said.
The company’s fully franked final dividend of 20 cents was in line with the previous year.
