Why the Suncorp Group Share Price Dropped 10%

Yesterday Suncorp Group [ASX:SUN] dropped 10.27%. SUN is a Queensland-based finance, insurance and banking corporation. The big drop yesterday makes it a 14.58% loss for the month of December.

Suncorp Group Share Price

Source: Google finance

I don’t know about you, but I’ve never liked insurance. Paying for something I never want to have to use is a foreign concept to me.  Take car insurance for example.

By law in Australia you need a minimum of third party insurance when you’re on the road. But I’ve never had an accident, and I never intend to. Sure, at some stage in my life I may have a car accident, but I’d rather pay one lump sum then instead of payment after payment on the chance I might have an accident. Still, insurance does have its place at times — especially if you live in a place with bad weather.

Suncorp hit hard by the weather

Cyclone Marcia hit central Queensland in March of this year. Marcia was a category five severe tropical cyclone.  Marcia affected up to 60,000 homes, leaving huge structural damage. SUN had many clients in need of compensation because of weather damage from this storm.

Now the last thing most people care about is where the money comes from to rebuild the home – as long as they get it. The emotional toll of rebuilding your life is far more of a concern. But shareholders of insurance companies DO care who pays for damages. Why? Because it affects share values.

Yesterday SUN announced that half year margins would be affected by payouts for the storm. SUN gave no sign of what profit margins could be. SUN has also blamed a ‘competitive industry’, ‘increasing costs’ and ‘a low Australian dollar’ for the decline in half year profits for 2015.

CEO, Michael Cameron said ‘The impact of the $4 billion of weather events [Cyclone Marcia and others] during 2015’ is one of the primary reasons for the profit shortfall. But isn’t paying out claims the job of an insurance company?

Apparently SUN were too busy whingeing about paying out compensation while investors sold down SUN’s stock this morning based on their excuses.

What does this mean for share price?

Natural disasters have hit SUN hard and it seems like profits won’t be the same for a while. The company stated that costs could even be mounting. Insurance Trading Ratio has also been impacted by the $75 million increase in the natural hazards allowance coupled with increased claims for third party insurance in NSW.

To be honest it seems like SUN could do with fewer excuses and more problem solving. Mr Cameron said he is ‘confident we [SUN] can address these challenges and continue to drive changes that improve outcomes for our customers, shareholders and other key stakeholders’.’ But Mr Cameron will need to show investors, through actions, how the company will overcome this in the short term.

Härje Ronngard,
Junior Analyst, Money Morning

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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