Good news for QBE as it polishes up its offer for Insurance Australia Group?
IAG’s confirmation yesterday that it had cut its insurance margin guidance for fiscal 2008 to 6%-8% due to storm costs and widening credit spreads, didn’t really take many analysts by surprise.
Some had been expecting it, others had been working off conservative numbers in valuing the insurer.
IAG had said in February that it expected an insurance margin at the low end of 9-11%, in the event of no large losses outside its allowances.
"This was subject to no catastrophes or large losses outside the Group’s allowances, or any material movements in currency or investment markets in the second half of the year," IAG said at the time of the release of its interim profit statement.
Its new, lowered guidance, it said yesterday in a statement to the ASX , was "mainly due to the impact of high storm costs and widening credit spreads in the second half.
"So far in this half year, these two factors have had a negative impact of 1.6 per cent on the FY08 insurance margin.
"The lower insurance margin guidance also reflects some further deterioration of the claims experience in the UK due to market conditions."
But IAG said the lowered guidance did not cause it to change its view of the bid for the company by fellow insurer QBE.
IAG chairman James Strong said the bid still was "inadequate because of the inherent and long-term value in IAG – its brands, market penetration and unique scale".
IAG also lowered its guidance on Gross Written Premiums (GWP) growth for the full year from the low end of 7%-9% to 5.5%-6.5%.
"This largely reflects reduced premium revenue from Australian Commercial Lines (CGU) as the business has not been able to maintain forecast volumes while adhering to its underwriting discipline," IAG said.
"GWP growth in all other businesses is still on track to meet earlier guidance."
IAG Chief Executive Officer, Michael Hawker said that while the Group continued to be adversely impacted by external factors, this masks the improving underlying trend half on half.
"Although our FY08 insurance margin is now lower than forecast, the performance of the underlying business is improving half on half and we expect this trend will continue into FY09 as we are already benefiting from improved operating efficiencies and reduced costs as well as ongoing underwriting and pricing disciplines.
"As a result, our performance in FY08 does not reflect our long-term prospects and underlying profitability.
"It reflects the current weakness in insurance cycles in our core markets, higher than normal frequency of severe weather events and the mark-to-market impact of volatile investment markets.
"We continue to be of the view that the Group is well positioned to improve its performance once more normal operating conditions prevail," Mr Hawker said.
IAG said its claims cost for storm events, net of reinsurance, from January to early April was around $135 million, including two large events in Australia (Mackay and the southern states windstorms), a number of smaller storms, and an adverse development in claims estimates from the 2007 UK floods.
"Taking these events into account and assuming that the Australian eastern seaboard continues to experience inclement weather, storm and large loss allowances for the second half of the financial year have been increased by around $56 million," IAG said.
"This reduces the expected insurance margin for the year by around 0.8 per cent.
"Inflationary pressures on repair costs following these events have also led to increases in average claims costs."
(Some local analysts have noted this softening in motor vehicle insurance thanks to the higher repair costs. This has been factored into their valuations)
IAN said that since January 1, widening credit spreads had created a further negative mark-to-market impact of $55 million on the insurance profit or around 0.8% on the insurance margin, as at March 31.
"The Group remains confident that, given the high credit quality of the securities held, this unrealised loss will be recovered as the securities mature," IAG said.
The UK motor insurance market continued to exhibit significant profit divergence between niche classes and private motor insurance where rate increases still lagged claims experience.
The Group has recognised an additional provision for claims deterioration in UK private motor and home insurance to address higher than anticipated claims costs in both bodily injury and property damage.
As a result, the Group has accelerated the rebalancing of its UK portfolio towards the more profitable specialty classes where insurance margins remain above 10%.
Recognising that the dynamics of the UK market had changed, IAG is reviewing its operating model, with an expected shift towards internet and branch operations to reflect customer preferences in personal lines and changes in product offerings and marketing.
Mr Hawker said IAG was taking initiatives to improve its performance in the second half of FY08 and into FY09, including a restructure of the Corporate Head Office which would save $7 million in FY09.
As well the company said the "Refinement of the structure of the Australian operating businesses from three to two, with synergies currently being identified; the introduction of a number of productivity measures in New Zealand with an annual saving of $16 million from the second half of 2008; and the completion of the synergy program for the UK business which has delivered &po
