Storm Damage Shaves $280m Off Suncorp Profits

Sydney Morning Herald

Saturday February 2, 2008

Danny John

SUNCORP'S plans to chase hugely profitable growth following its $7.9 billion acquisition of rival insurance group Promina last year have been dashed for the immediate future by a growing bill for storm damage across Australia and New Zealand that has hit $280 million.

The group revealed yesterday it expected the payout for claims resulting from a series of bad weather events, including the big hailstorms in Sydney in December, would be even higher than the top-of-the-range forecast made just before Christmas.

The impact of the bill will also see premiums rise for millions of customers who have taken out household and motor insurance through Suncorp's various operations, which include leadings brands AAMI, GIO, Vero and APIA, the group's chief executive, John Mulcahy, warned.

The Sydney storms alone resulted in a bill for $170 million, to which has been added $110 million to cover insurance payments for floods and a recent earthquake in New Zealand and storms in northern NSW.

Suncorp had previously indicated that the impact on its first half results, due out at the end of this month, would be between $230 million and $260 million. Storms in Melbourne have pushed that estimate up by a further $25 million.

Shares in the banking and insurance combine, however, responded by rising 63 cents to $15.97 as the market indicated the costs were factored into its next set of profit figures.

Nonetheless, while Mr Mulcahy played down suggestions climate change would lead to greater and more regular storms, Suncorp will feel the financial pain in the short term.

Yesterday it cut its insurance trading margins - basically the money it expects to earn from providing such cover - from 13 to 16 per cent for the full year which ends on June 30, to just 9 to 12 per cent.

However, it hopes to offset the effect on its interim and subsequent second-half results by extracting greater savings than it expected from the merger with Promina. These should reach $325 million a year, which is $100 million a year higher than it anticipated, although this year's amount will be countered by an extra bill of $20 million for bringing the two businesses together. The one-off cost in 2008 will now be $375 million - $50 million more than what it will extract in its expected first year savings.

Analysts anticipate that Suncorp will turn in full-year net profits well below last year's record $1.06 billion as it juggles with the unexpected damages bill and the difficulties of integrating two large companies. Deutsche Bank expects a figure of $895 million while Merrill Lynch is forecasting $926 million.

© 2008 Sydney Morning Herald

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