A combination of the credit crunch, economic slump and bad weather has hit some of the country’s leading financial stocks hard.
Westpac, Insurance Australia Group and fund manager, Perpetual, also reported some damage yesterday in reports to the ASX
We already know that the likes of the Commonwealth Bank, the NAB and the ANZ have reported higher bad debts and the CBA a 16% fall in cash earnings for the December half year.
Suncorp is trying to complete a $1 billion raising by approaching shareholders who have seen billions of dollars in value wiped from the value of their holdings.
The company’s bank, Metway, is suffering from soaring bad debts, especially in corporate and some property and falling returns in insurance as big storms and fires in Queensland and Victoria complicate the problems caused by plunging returns on investment funds and reserves caused by the credit crunch.
Insurance Australia Group (IAG) was probably the most dramatic of the reports from yesterday.
It warned its first-half profit will slump to just $4 million after its bottom line was savaged by a high number of claims and volatile financial markets. (A replay of what hit Suncorp’s insurance companies, led by Promina and GIO.)
Dividend was slashed by around 66% to conserve cash.
A 23 page update contained the horrible news for shareholders.
Like Suncorp, IAG needs to raise money quickly, so it announced plans to raise $550 million, by placing about $450 million of shares at $3 each to institutional investors last night through Goldman Sachs JBWere and then asking small shareholders for the additional $100 million from the share purchase plan.
It’s going to be a tough ask, just as Suncorp is apparently finding it tough to get money from shareholders at $4.50 a share.
IAG’s issue price is a 13% discount from the last sale of $3.46 before a trading halt was called yesterday.The shares will drop to $3 when trading resumes as expected today.
IAG’s expected interim profit of just $4 million for the December half is down from $110 million in the first half of the 2008 financial year. Full results will be released next Wednesday.
"The group expects to report a net profit after tax of $4 million for the six months … which has been significantly impacted by the adverse movements in investment income on shareholders’ funds due to weak equity investment markets, as well as the previously announced loss on sale of the non-core mass market operations in the UK,” it said in a statement yesterday
IAG said its first-half insurance margin would be 6.2%, down from the expected 10.3%.
Chief executive Michael Wilkins said in the statement that the margin would have improved to 10.3% but for the impact of a widening in credit spreads, a $42 million net impairment on deferred acquisition costs and natural peril claim costs.
The wider credit spread will lower its insurance profit by $96 million, while claims exceeded its first half allowances by $23 million due to weather events in New Zealand and Queensland.
Before these one off items, IAG said its insurance profit will rise to $227 million in the first half, from $190 million.
The company said that "It is anticipated that the Board will determine to pay a fully franked interim dividend of 4.0 cents per ordinary share when it meets to review and approve the finalised half year results (1H08: 13.5 cps).
“This is in line with the Group’s revised dividend policy to pay out 50–70% of cash earnings."
That’s around a third the 13.5 cents a share paid out in last financial’s year’s interim result.
Mr Wilkins said that the Group "remains confident of further improvement in underlying operating performance over the balance of FY09 and beyond, however it has revised its full year insurance margin guidance".
“During the second half of the year, we expect to see the full realisation of the targeted $130 million per annum of pre-tax cost savings in our Australian operations, the impact of premium rises, including the earned effect of rises in FY08, and the favourable effect from the portfolio changes we’ve introduced, including our reduced exposure to the UK’s poorly performing mass market operations,” Mr Wilkins said.
“The Group is on track to deliver its full year guidance of 0-2% reported gross written premiums (GWP) growth, and underlying GWP growth of 3-5%.
“We have, however, updated our full year insurance margin guidance to 6%+, from the previous guidance of 10%+, to take into account the adverse impact of widening credit spreads and the net DAC impairment in the first half, as well as the expected increase in natural peril claim costs particularly in light of the fires across Victoria.
“The revised guidance is consistent with the previous guidance when allowing for these adverse influences.
“The Group has so far received in excess of 2,600 claims relating to the fires in Victoria, predominantly through CGU and IAG’s 70% owned joint venture with RACV, Insurance Manufacturers of Australia.
“While it is still too early to accurately estimate the gross cost of the claims, it is now highly likely that the ultimate cost will reach our maximum event retention under our reinsurance arrangements, which means the Group’s exposure net of reinsurance will be capped at $126 million.
“As a result we now expect the Group’s natural peril claim costs to exceed our budgeted allowance of $314 million for the full year by ap
