Suncorp Cops A Storm Warning

Sydney Morning Herald

Friday June 22, 2007

Edited by Stuart Washington

The trail of damage wrought by wild weather has brought gloom to insurers.

FOR all the talk of sunny uplands awaiting Suncorp-Metway following its $7.9 billion acquisition of insurer Promina, the recent NSW storms have blown away any immediate prospect of a better-than-predicted performance from the merged group.

Insurance is all about timing, particularly when it comes to earnings cycles, and Suncorp thought that it had picked its moment to take out the owner of the successful AAMI, Vero and Just Car brands.

But the risk in such deals is the unpredictable and so it has proven with the weather that has wreaked immense damage in the Hunter Valley, around Newcastle and the Central Coast, leaving a bill nudging $1 billion in total economic costs and estimates by the Insurance Council of Australia of insurers picking up the tab for $350 million.

The bottom line for Suncorp is a $160 million hit to its pre-tax profits for this year. In that regard, it has been pure bad luck for Suncorp albeit that the biggest hit - $100 million - has been felt by its existing insurance businesses, GIO included, which have so far received 7000 claims.

As for the Promina brands, they have had 12,000 claims against them but with a significantly lower impact on profits of $60 million .

The combined hit is the maximum to be incurred by the group as its reinsurance policies (the insurance it takes out from other third-party groups) have now kicked in.

It has not been enough though for Suncorp to avoid further profit downgrades which had analysts at Macquarie Research, Citigroup and ABN Amro yesterday all lopping a further 2 to 3 per cent off their current forecasts after the reductions of 6 per cent last week.

It's a bit of lottery as to where the net profit figure for 2007 will come in since the predictions range from a low of $992 million through $1.035 billion to a high of $1.08 billion.

After the impact of Cyclone Larry in its insurance heartland last year, Suncorp is now finding out that there are two sides to the expansionary argument which it voiced a few months back to justify the high price it paid for Promina.

Yesterday's cloudy outlook for the stock saw Suncorp's shares slip a further 27c to $20.35.

Premium property

Within the next two weeks all of the listed property trust sector will be trading ex-distribution. That will, on paper, unleash close to $2 billion into the coffers of property investors.

Normally, as stocks go ex, a sell-off follows as fund managers offload the excess stock they had been holding (to be eligible for the distribution). However, this year could be different for the property industry, for two significant reasons.

The first is that no one is going to sell in the week before the end of the financial year.

Secondly, with Australian LPTs now firmly on the radar as targets for overseas private equity players, it's a brave fund manager that gets out of a stock before a takeover offer is launched. Trade in the LPT sector this week has mirrored this sentiment with the property index continuing to outperform the overall equity market.

The stock that has been the standout is Westfield. Hedge funds have been trading in Investa and Multiplex to get the distribution and any cash they have made (so far on paper) has been ploughed back into Westfield. Buying it gives an investor an instant 36 per cent exposure to the LPT index, as well as liquidity and early warning about consumer sentiment.

And one to watch: now Blackstone is out of the running for Coles, keep an eye on Lend Lease - if they don't want it, maybe a Mirvac/Leighton Holdings consortium does.

Elmo's only options

Sigma Pharmaceutical's Elmo de Alwis seems to have two options left if he is to get in on the carve-up of Symbion Health: a new partner or a legal stoush.

De Alwis wants Symbion's pharmacy and consumer businesses, and bid $1.085 billion for them on Monday. But the previous bidders, private equiteers Ironbridge Capital and Archer Capital, trumped the bid by a cheeky $1 on Wednesday. Symbion has accepted their offer and closed the door on any further offer for its pharmacy and consumer operations.

But de Alwis is maintaining a fighting stance. He is looking at other options, he says, and is keen to maximise value for the good shareholders of Symbion.

One option is a legal joust. De Alwis says his lawyers are poring over legal precedent as to whether Sigma can challenge Symbion's refusal to accept another option.

And the other possibility is to link with a partner in a warts-and-all bid for the entire Symbion operation. The partner would be needed to purchase Symbion's pathology services and medical centres, which does not fit into Sigma's business.

But in the tightly consolidated health-care sector, partners are tough to find. One mooted possibility is Primary Healthcare, which had its own takeover bid for Symbion rebuffed in February.

Industry funds ahead

Retail fund managers took it in the eye - again - with the release of the latest SuperRatings monthly research.

Industry funds happily reported yesterday that in SuperRatings' SR50 Balanced report, industry funds took out 15 of the top 20 places in the year to May. Balanced fund options from industry funds Catholic Super, Westscheme and NGS Super (the non-government schools fund) took first, second and third positions on the basis of their returns over the year.

Lest anyone in retail fund land argues that this is a flash in the pan, the Industry Super Network is pleased to point out that in the same SR50 Balanced, industry funds were the top seven positions over the past five years and top five over the past three years.

Still sizzling - just

Austar kept some sizzle in the somewhat deflated takeover sausage with the appointment of a broadband network provider for its you-beaut wireless broadband network.

Mind you, there is a limit to how much excitement can be put on the announcement of Nortel as its preferred vendor.

Remember that Austar put its intended roll-out of broadband on hold earlier this year while it sorted out the small matters of its broadband network provider and the new technology known as Wi-max it intends to use.

Like much in the broadband debate, there was long rhetoric and short details in Austar's announcement, including no details on cost, timing and locations for roll-out.

xchange@smh.com.au

© 2007 Sydney Morning Herald

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