article in australian

Not much joy in this article,most of it conjecture at this stage,but she does have a good point about a dip in the talent pool.

Adele Ferguson,The Australian


"AS Brisbane battles its worst flood crisis since 1974, the timing couldn't have been worse for banking and insurance giant Suncorp Metway, which is about to negotiate its annual reinsurance renewals with a group of reinsurers.

Reinsurers in Australia have made significant losses on property catastrophe treaties in the past year and, going by the latest floods in Brisbane, the red ink will be overflowing. In addition, since their last renewals, the financial world has changed significantly.

Industry talk is that loss-free cover (cover that hasn't generated any losses) will go up by 10 per cent in the next round of renewals in Australia and reinsurance covers with losses will increase even more, perhaps north of 20 per cent.

In Japan, which negotiates most of its reinsurance renewals in April, costs rose between 4 and 7 per cent.

But Japan had few losses, which is in sharp contrast to Australia, which has suffered bushfires, floods, storms and a few significant man-made catastrophes.

For Suncorp, some of the hike will be passed on to customers through higher premiums, but the size of the increase will depend on what its competitors such as IAG do with their rates.

The insurance game industry is bitterly competitive, so if one can win market share from another without hurting margins, they will do it.

The way reinsurance generally works is 10 or 15 reinsurers get involved in a treaty.

For instance, Munich Re could be the lead reinsurer, followed by layers upon layers of other reinsurers. Reinsurance is a bit like pass the parcel, only the parcel being passed in this instance is risk.

Suncorp pays in excess of $400 million in reinsurance premiums a year.

According to Suncorp, reinsurers as a group have not lost money on any of Suncorp's main reinsurance programs apart from property damage this year.

It says the property catastrophe cover costs between $200 million and $300 million in premiums a year. The company says even this year -- the worst in recent experience -- the reinsurers as a group will roughly break even.

It says this is because the reinsurers at the bottom layer represent less than 10 per cent of the premium for the whole program.

"We buy a big program and have only had losses at the bottom," the company says. "Those reinsurers who are new in the last two years and play at the bottom end will be in the red. Those who are long-term partners and write the same share across the board will still be well in the black."

While this is true, Suncorp needs every reinsurer due to the size of their program and so if the lower layers of reinsurers are bleeding, they will demand big price increases in the renewal talks.

Wilson HTM analyst Brett Le Mesurier says: "Investors should expect that the cost of Suncorp's reinsurance program will increase and/or the size of its maximum event retention (MER) will also increase next financial year. If the MER increases, then so do the general insurer's capital requirements. This is an unfortunate addition to the bank's asset quality concerns."

In the case of the floods in southeast Queensland, the costs are unlikely to hurt Suncorp's profit.

Goldman Sachs JB Were says in a report: "Going into 2010-plus, however, we need to think about two things: will this event cause reinsurance costs to go up even more than we were already expecting? At the margin, yes.

"And have the last couple of years just been an aberration? Or is the 'normal' run-rate of claims permanently higher than the companies used to think? Probably the latter, especially relatively to Suncorp's current budgets -- which is why we're assuming Suncorp's budgets will need to be raised -- hence our below-consensus margin forecasts."

Until the renewals are complete, it is all speculation, but any price rises, or taking on more risk, will not be welcomed by an investment community that has watched the group's share price fall from a high of $23.50 a share to its current $6.25 share price.

On Wednesday, Suncorp and acting chief executive Chris Skilton -- who was put into the job in February after John Mulcahy resigned -- will be issuing the quarterly banking credit quality and capital update. It is based on data to March 31, 2009, and is a legal requirement as part of Basel II.

The market will be carefully watching for any deterioration in its bad and doubtful debts, any new large-scale name exposures, and its tier-one capital and look for any indications about the long-term intention of the bank.

Suncorp recently split its banking business into a good bank and bad bank. The bad bank holds $16.8billion of assets, or a third of its banking business, which will promptly be put into run-off.

The most positive thing about the split is that it will make it easier to sell the good bank in a trade sale or float it on the ASX as investor confidence returns.

Right now, the market is not attributing any value to the bank.

The speculation that a bank will buy Suncorp's banking business will not go away. The problem for Suncorp is that the Big Four banks would probably be knocked back by the ACCC, which leaves Suncorp with few options.

The concerns with Suncorp, both externally and internally, are many. They include the quality of the bank's loan book, the size and composition of the board, the integration of its pricey $7.5billion acquisition of general insurance giant Promina and lack of succession planning.

To help rebuild the company's credibility, it needs to act quickly to find a new chief executive with strong insurance experience.

While Skilton is doing a fine job managing Suncorp until a successor is found, his ultimate plan is to retire, given he was passed over for the chief executive's job.

This is not a good position for the company to be in and reflects poorly on the board, particularly chairman John Story, who looms as a dominant figure across Suncorp.

Story has been on the Suncorp board since 1995 and became chairman in 2003. Many investors have questioned why he still remains, given his length of tenure and the poor performance of the group under his watch. He is also chairman of Tabcorp and a director of the struggling CSR.

On its website, Suncorp lists 11 directors on the Suncorp board, most of whom have little insurance experience. Story indicated at the last annual meeting a commitment to refreshing the board, but there has been little action to date.

Part of the problem lies in the company's own constitution and Queensland legislation, which requires the Suncorp board to have a minimum of five or 40 per cent of the board (including the managing director), whatever the greater, to be resident in Queensland.

This unique aspect is often overlooked and doesn't seem to have been a catalyst for outperformance.

Nor does it fit with the present-day Suncorp, which is a national company listed on the ASX.

Such an outrageously outdated requirement should be amended so that the right people sit in these well-paid positions.

The company's issues are an ugly read: higher claim costs, which can be expected to lead to higher reinsurance costs or increased capital requirements or both; deteriorating asset quality in the bank; high funding costs for the bank; an incumbent board, many of whom are responsible for the ill-fated Promina acquisition and the development of the Bad Bank.

If ever there was a company needing an urgent talent injection, it's this one."