Suncorp’s (ASX:SUN) business interruption provisioning covers claims costs in 90% of possible outcomes

  • November 16, 2020 01:14 PM AEDT
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Suncorp’s (ASX:SUN) business interruption provisioning covers claims costs in 90% of possible outcomes

Summary

  • Suncorp Group (ASX:SUN) had a total impairment loss of $3 million during September quarter, with a total of $3.0 billion of loans under temporary loan deferral arrangements as of September 2020.
  • The company expects a neutral effect on a broader level on its General Insurance portfolio for the first half of the FY21.
  • The Group has adopted a prudent approach while assessing the provisioning for the BI claims for FY21 and covered the claims cost in 90% of possible outcomes.
  • Suncorp New Zealand had maintained NZ$78 million of excess CET1, welcoming the updated guidelines by the RBNZ on dividend payments.
  • The company expects a total of $173 million of deficit to be unwound by the end of this year to become profit neutral for FY21.

The shares of Suncorp Group (ASX:SUN) started the week with an uptick, gaining marginally 1% at $9.26. In the November month, the share price has already risen by 12%, and the last six months return stands at 5.3%.  

On 16th November 2020, Suncorp released an update regarding a host of developments.

  • Expected damage due to COVID-19 to its General Insurance and Banking businesses
  • Capital requirements for New Zealand
  • APRA General Insurance statistics for the September quarter.

The group had a total impairment loss of $3 million for the September quarter with strong credit quality. The group’s review of the economic assumptions concluded to have a collective provision intact, which supports the conservative base case economic outlook.

The group reported a total of $3.0 billion of loans under temporary loan deferral arrangements, as of September 2020, which represents 7.6% of the SME portfolio and 4.0% of the housing portfolio.

General Insurance and Banking businesses

The company expects a neutral effect on a broader level on its General Insurance portfolio for the first half of the FY21. The management’s assessment for potential business interruption (BI) claims in FY21 concluded the second Victorian lockdown, three-month premium waivers, short term reductions in motor claims frequency and other factors with an overall net impact.

Despite these challenges, the group is confident on the intention of its BI policies and has adopted a prudent approach to cover the claims costs in 90% of possible outcomes, which is considerably higher provisioning than the expected outcome. While assessing the provisioning, the group has considered its exposure to BI claims across a wide range of industries and geographies affected by COVID-19.

A prudent valuation approach has been adopted to assess the potential for BI claims in relation to COVID-19 from the second Victorian lockdown. The valuation approach concluded a pre-tax provision of $125 million towards the BI claims for the first half of the FY21 financial year. This does not take any further severity of the outbreak into consideration.  

The total provision for potential BI claims against the impact of COVID-19 has notched up to $195 million (pre-tax).

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New Zealand Capital Requirements

The group has welcomed the Reserve Bank of New Zealand’s (RBNZ) updated guidelines regarding the dividend payments, according to which it will maintain a conservative approach to capital management. As of 30th June 2020, Suncorp New Zealand had maintained NZ$78 million of excess CET1 (Common Equity Tier 1) which is even above its top end of the target range.

APRA September 2020 Quarterly General Insurance Statistics

The Australian Prudential Regulation Authority (APRA) would publish financial statistics for the general insurance industry on 26th November 2020 for the latest quarter. One metric, impact to the profit & loss statement of several key adjustments, would not be included there but is included in the group’s regular financial disclosure.

The regulatory filings include the results of a wholly owned subsidiary of Suncorp Group; AAI’s Liability Adequacy Test (LAT) for the September quarter with significant seasonality. Typically, the September quarter is the weakest quarter for the company owing to the upcoming summer season. The increased natural hazard allowance for FY21 and the impact from lower yields has also reflected the deficit, this time.

The company expects a total of $173 million of deficit to be unwound by the end of this year to become profit neutral for FY21.

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