IAG Result Is Not As Bad As It Looks

Sydney, Aug 25, 2008 (ABN Newswire) - Yes it was a "poor result" for Insurance Australia Group, as the newish CEO, Michael Wilkins said after clearing the decks and producing a big loss for the year to June.

It was blame it on the former CEO who has departed tactic from Mr Wilkins.
Insurance Australia Group has reported an annual loss of $261 million, hurt by impairment charges and a rise in weather-related claims, and unveiled plans to scale back its UK operations and look for growth in Asia.

The insurer noted that the result was in line with earlier guidance. In 2006-07, IAG reported a profit of $552 million.

The shares rose 6 cents, or 1.6%, to close at $3.75.

IAG announced in July that it would scale back its operations in the UK, and reduce operational costs in Australia by $130 million a year from 2009, in an attempt to increase discipline and focus. Around 600 jobs are going in Australia.

IAG declared a fully franked final dividend of 9 cents a share, taking the total dividend for the year to 22.5 cents a share, down naturally from the 29.5 cents of 2007.

But a few points can be made.

The fact that a final dividend was paid, despite the loss, indicates that the board sees an upturn coming and that the company isn't that short of capital.

Secondly, it should be remembered that QBE was interested in buying the company, despite the problems: it's management saw value and although it has gone elsewhere (buying the local operations of mortgage insurer, PMI for $1 billion), it would be back in a flash if invited by the IAG board.,

And thirdly, the poor results were not just at IAG, even if its exposure to poor performing UK businesses made the bottom line look worse. It was management's decision to have the usual clean out.

It should be remembered that poor performances also came from competitors, AAMI and Suncorp, while QBE's insurance result was nothing to write-home about in Australia.

All insurers were hit by a combination of bad weather, falling investment returns and increased market volatility caused by the credit crunch.

That was enough to batter the bottom line of Warren Buffett's Berkshire Hathaway group in the US where its insurance businesses were hurt by falling returns and premiums; while Berkshire's reinsurance businesses did it tough.

So did the likes of Munich Re, Swiss Re. And American International group, the biggest Us insurer by assets was crippled by poorly designed and poorly understood credit derivatives which have cost it the best part of $US15 billion or more, on top of a less than happy insurance result.

IAG had the extra burden of non-performing UK insurance businesses acquired at the top of the market, and just before some very poor weather hit the UK in 2007. In contrast QBE's UK businesses didn't have the same problems, or exposure.

But If you look at the IAG result, you see much of the problems were beyond its control, and that there has been this clearing out of over ripe asset values in a now typical cleansing process that all new CEO's do. From now on the problems, if they emerge, will be those of the IAG run by CEO, Michael Wilkins.

And there's a common theme: the bad weather and the low returns on investments caused by the volatile markets and credit crunch: they could not be avoided. see the bits in bold)

"The Australian Direct Insurance business had underlying (Gross Written Premiums) GWP growth of 3.8% for the full year (adjusted for the impact of the Lifetime Care & Support Scheme). The Queensland and Western Australian portfolios grew by around 10%, while the largest portfolio, NSW home and motor, grew 4.1%. The insurance margin for the year was lower at 11.1%, affected by storms and widening credit spreads, the company said in its profit statement.

"GWP in the Australian Intermediated Insurance business (CGU) decreased 1.8% as the business maintained underwriting discipline and chose not to renew business where pricing was inadequate.

"The insurance margin was down from 9.4% to 7.4% due to higher storm costs, claims inflation, lower reserve releases and widening credit spreads. The June renewal season showed promising signs around the cycle, particularly in the SME market while in the middle market renewals were generally maintained at expiring terms.

"The New Zealand business recorded an insurance loss of $17 million due to an unprecedented number of claims from storms, an earthquake and other large losses. Revenue was up 2.4% in local currency terms, benefiting from rate increases, in particular in the commercial market where the cycle is hardening.

"In the UK, Equity Red Star remained profitable while Advantage improved its performance in relation to the market and is now operating at close to break-even. The private motor market remained difficult. In response the Group implemented further rate increases and reduced exposure to private motor in favour of specialist lines. In line with the refined corporate strategy, the Group is now scaling back its UK operations to the specialist underwriter, Equity Red Star and associated specialist distribution.

"In Asia, the Group's insurers in Thailand grew GWP by 5.1% in local currency terms while AmAssurance, in which the Group has a 30% interest, increased GWP by 15% in local currency terms. The profitability of both was affected by weak investment markets.

"Investment income from shareholders' funds reduced during the period as a result of weak markets globally. The Group's return from shareholders' funds was $24 million, which included a $69 million revaluation benefit from the RES exchange right embedded in the Group's fully funded off balance sheet contingent capital arrangement. This compares with an investment return of $301 million in FY07."

And the Outlook?

Mr Wilkins said in a statement that "the actions the business was taking to increase its efficiency, maintain pricing discipline and improve the customer experience should give shareholders confidence that the current financial year will bring an improved performance.

"He said the Group expected to generate underlying GWP growth of 3–5% for the year ending 30 June 2009, while reported GWP is expected to grow around 0–2% due to the Group's change in its UK strategy and the introduction of six-month CTP policies in NSW.

"The Group's FY09 insurance margin is expected to be above 10%, and now includes corporate expenses and the NSW Insurance Protection Tax, which were previously reported separately and are equal to about 1% of the reported margin.

"IAG is a unique asset with leading franchises and iconic brands," Mr Wilkins said. "We are confident that our revised strategy and actions will improve shareholder value in FY09 and beyond."

It's a shared experience across all financial groups around the world. QBE had been budgeting for a 5.5% return on its investments at the start of the year; that was cut to 5% when the first quarter fell short at a 4.3% return. 

In its profit report last week directors cast doubt on whether the 5% forecast return would be met because of the volatility in markets. QBE was also having trouble meeting its new business goals.It's not alone, blame the insurance cycle and difficult economies.And bad weather.


 

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