Group Earnings
Suncorp Group reported a full year 2015 cash earnings of $1,191m, down 8.7% from $1,304 million. This result was broadly in-line with market expectations despite the financial impact of the group’s worst year of natural hazard events which saw the allowance of $595m dwarfed by the final net impact of $1,068m. Headline numbers look solid but the composition of core earnings is a little soft. General Insurance profits were supported by higher reserve releases and the underlying insurance trading result  was boosted by strong (but unsustainable) investment yields. The operating expense ratio is also showing further signs of improvement and declined again to 22.6%. Bad and doubtful debts were lower which offset higher expenses within the bank.
By Division: General Insurance
The General Insurance division delivered no growth for Gross Written Premiums (GWPs) at $8.9bn (and slightly down when excluding Compulsory Third Party and New Zealand). Turning this into profit, the group experienced a Net Earned Premium of $7.9bn, an increase of 1.8% on the prior year. Claims (net of reinsurance and recoveries) were 6.6% higher at $5.6bn. We note that the claims result included a the company worst year of natural hazard events which saw the allowance of $595m dwarfed by the final net impact of $1,068m. (i.e Brisbane Hail Storm, Cyclone Marcia). These numbers were offset by the reserve release of $427 million. Operating expense were well contained (+0.4%) but overall the GI unit produced an underwriting result of $495m for the year, down 30% on June 2014. The unstable investment environment translated into a weaker investment result (both insurance and shareholder funds) and in turn a weaker Insurance Trading Result (ITR) of $894 million. Suncorp views the Insurance Trading Result as the best measure of operating efficiency (as opposed to the Combined Operating Ratio). On an underlying basis, the ITR  increased to of 14.7% and is now almost 3% higher than three years ago.
We note that the natural hazard allowance for 2016 has been raised to $670m (up 13%) and the reinsurance program completed at favourable terms to Suncorp.
By Division: Bank
The bank result partially offset the GI business unit as pre-provision pre-tax profit increased 21% to $564 million. This result was strong but the primary features were very low bad & doubtful debts of $58 million, higher expenses of $646 million and in turn a cost-to-income ratio of 53.4% (still above Suncorps target of sub-50%). The net interest margin of 1.85% was up 0.13% on the previous year and at the top of the target range (1.75-1.85%). Suncorp delivered loan growth of 3.9% but mortgage growth was much stronger and at 7.1% (SUN target 1‐1.3x system for retail lending). This all translated into income growth outstripping cost growth. The biggest question remains around the impairment costs (down by over 50% to just $58 million) and releasing of specific agricultural provisions.  Agribusiness remains the largest impaired segment and we remain cautious of reducing provisions in this portfolio even if the outlook has improved. Gross impaired assets fell almost 35% to $218 million (0.42% of gross loans and advances).  
By Division: Life
The Life business unit recovered from actions taken in 2014 to record a net profit of $125m. Claims and lapse activity continued to improve but risk in-force growth (5.6%) and Superannuation AUM growth (3.7%) were on the low side. There is still some uncertainty about Suncorps commitment to this division but at this stage we believe thing will remain unchanged.
Capital Management
Suncorp’s changing capital management plan was the highlight of the full year results. As the business evolves Suncorp is seeking to reduce the capital intensity of the business units and individual capital impacts (i.e natural hazards) through diversification benefits and moving the bank to advanced accreditation. Over the past few years the groups high dividend payout ratio (~97% including special dividends) has contributed to see excess common equity Tier 1 capital reduce to AUD570M ($831 million in 2014). While this is a good thing for equity investors it is not favorable to debt and hybrid investors. The new GI target for capital is 0.95‐ 1.05x the prescribed capital amount (down from 1.05‐1.15x previously). This means the GI business unit has significant excess capital as the multiple was 1.4x at year end. SUN confirmed it had no intention of paying out the excess capital (in short term) that resulted from the changed target but in our experience this on only a matter of time. From the banks perspective its reported common equity tier 1 ratio of 9.15% is well within its new target of 8.50-9.0% (up from 8.0-8.5%). The difference between the GI and bank capital target is fairly neutral but in our opinion the transition will inevitably result in increased capital leverage for the group (admittedly this will place them on a level playing field with the major banks). 
Overall, Suncorp Bank’s CET1 ratio sits at the top of the range for the domestic banks but we expect that the regulator is more likely to increase the capital requirements of the majors rather than decrease the requirements of Suncorp. It is also our understanding that Suncorp expects to be in a position to submit its application for advanced accreditation in the second half of 2015. Given the uncertainty surrounding the current BCBS review (i.e Basel IV) we think it is unlikley (albeit unfair) that they will be approved in the short term.
Funding and Liquidity
SUN’s retail funding ratio of 59.4% increased slightly for the period (just shy of the 60% to 70% target). The composition of retail funding continues to change (decline in term deposits offset by increase in transactional accounts) and although wholesale funding was up marginally securitisation remains a key funding tool for the group.   From a liquidity perspective the bank has minimal maturities coming due in the short term and is meeting the new liquidity coverage requirements but has not disclosed any amount.