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6. Operating and fnancial review (continued)

6.1 Overview of the Suncorp Group (continued)

The General Insurance proft after tax was $392 million. This result was achieved despite the unprecedented sequence of natural hazard events. Natural hazard claims were $325 million in excess of allowances and additional reinsurance protection costs were $232 million. Improvements in the management of long‑tail claims and reduced claims handling costs have resulted in central estimate reserve releases that were $310 million, well above the Suncorp Group’s normal expectations.

The Banking proft after tax was $84 million. The run‑off of the non‑core portfolio progressed ahead of expectations, with total lending reducing by $4.9 billion over the year. Impairment losses on banking loans and advances were down signifcantly, to $325 million from $479 million. Life’s proft after tax of $149 million was impacted by higher than expected claims costs, policy lapses and divested businesses.

Cash earnings per share (excluding divestments), which forms the basis of the Suncorp Group’s dividend payout calculation, was 50 cents. The fnal dividend of 20 cents brings the total payout ratio to 70%, at the top end of the Suncorp Group’s increased target payout ratio.

6.2 Financial position and capital structure

The Suncorp Group has a strong fnancial position with shareholders’ equity at $14.0 billion. The Suncorp Group’s capital position has strengthened during the year due to earnings, divestments and the run‑off of the Bank’s non‑core portfolio. The balance sheet responded well to the multiple external events and the capital position remains strong, with the quality of capital signifcantly improved. Given the strength of the capital position, the Board has: –– redeemed subordinated debt of $520 million during the year

–– increased the target dividend payout range to 50% to 70% of cash earnings excluding divestments

–– declared a fnal dividend of 20 cents per share, bringing the total ordinary dividend for the year to the top of the increased target range of 50% to 70% of cash earnings per share excluding divestments

–– redeemed $42 million in Reset Preference Shares for cash consideration following the NOHC transition in January 2011

–– agreed to the exchange of $72 million in Reset Preference Shares for cash consideration in September 2011; and –– maintained a zero discount on the Dividend Reinvestment Plan (DRP) and neutralised the impact of the DRP on dividends by buying shares on‑market.

At 30 June 2011, on a regulated entity basis, the General Insurance Minimum Capital Requirement (MCR) is 1.64 times the regulatory minimum and the Bank’s Capital Adequacy Ratio (CAR) is 13.4%. The Suncorp Group’s capital targets were recently revised by the Board to refect a more appropriate risk appetite for the Suncorp Group in the current operating environment. As such, an amount of capital equivalent to 0.05 times the General Insurance MCR and

0.5% of the Bank CAR is now included in the target capital base of the Company. At the operating level, the target levels are now 1.45 times the General Insurance MCR and 12.5% of Bank CAR.

Based on current targets, the Suncorp Group holds surplus capital of around $1,245 million. The Board continues to believe it is prudent to retain a capital buffer while regulatory, economic and natural hazard uncertainties remain. Additionally, the Suncorp Group will seek to ensure that current credit ratings are maintained.

6.3 Impact of legislation and other external requirements

Signifcant legislative and regulatory changes as well as a number of Government enquiries that impact or could impact the Suncorp Group’s operations continue to take place in Australia and New Zealand. After the severe foods in Australia during late 2010 and early 2011, the Federal Government established the National Disaster Insurance Review which is due to report to the Government by the end of 2011. The Review will concentrate on insurance arrangements for individuals and small businesses for damage and loss associated with foods and other natural disasters and will consider a number of specifc issues including the extent of, and reasons for, non-insurance and under insurance for food and other natural disasters and the ability of private insurance markets to offer adequate and affordable insurance cover.

The Federal Government is consulting on two proposals to provide greater clarity in respect of insurance policies, frstly, having a standard defnition of ‘food’ for use in insurance policies and secondly, having a short, simple key facts summary for insurance policies (initially for home building and contents policies) made available to consumers. In early 2011 the Productivity Commission released a draft report called Disability Care and Support. The report recommends the establishment of a no fault national injury insurance scheme comprising a federation of current individual State and Territory compensation schemes which would provide fully funded care and support for all cases of catastrophic injury. The Commission has fnalised its report and recommendations and has forwarded it to the Federal Government. The Federal Government has yet to respond to the recommendations in respect of a no fault national injury insurance scheme.

The Australian Prudential Regulation Authority (APRA) continues consultation on the harmonisation and review of general and life insurance capital standards and has stated it will consider the Basel III reforms in the context of its review of the general and life insurance capital standards. The Basel III global capital and liquidity reforms for banks and other fnancial institutions were fnalised by the Basel Committee on Banking Supervision. APRA will be working with industry through 2011 and 2012 to implement the reforms which are expected to be phased into effect, starting on 1 January 2013. The reforms are expected to impose new liquidity requirements on, and increase the required quality and quantity of capital held by, authorised deposit taking institutions (ADIs) in Australia.

Directors’ Report (continued)