There are some nasty profit downgrades emerging that call into question valuations on the Australian stockmarket and the efforts of various analysts who follow these companies.
The country’s biggest general insurer, IAG, stunned the market yesterday with news that it has had to pump another $365 million into its troubled UK operations (which it is exiting anyway).
The news sent IAG shares down sharply, around 9% and more at the opening.
The shares ended down 22c, or 6.1% at $3.39.
IAG’s news followed three other unforeseen market shocks in the past month.
Tuesday, shares in Downer EDI fell 27% after it revealed losses and write-downs and provisions of around $250 million on a troubled NSW rail contract, and on problems in other parts of the business.
Last month Sonic Healthcare shares dropped 25% in one day after it cut guidance last month in a major surprise.
And last Friday, Virgin Blue saw its shares down 33% at one stage after it cut its 2010 earnings estimate by more than 60%.
On top of this, major and medium level retailers from Coles Group, Woolworths, Metcash, JB Hi-Fi and Harvey Norman have all reported a surprise slowing in sales growth in the past couple of months, or pointed to more of the same for the rest of the year.
Many of these downgrades were not seen by analysts and big investors, which lead you to believe whether they have been out to lunch for too long, or more focused on super resource profits taxes.
IAG’s warning, though, came right out of the blue: analysts have been concentrating on what’s happening in the Australian insurance market with Suncorp shaking up things by merging its myriad insurance brands and trying to cut costs.
Local insurers, especially in motor vehicle and home insurance and contents, have had to battle a flood of new, cheaper cost entrants in the past year to 18 months, many based on internet sites, and trying to price cut their way to significant market share.
IAG’s problems in the UK were thought to have been put behind it with the decision to pull back, especially from the motor vehicle side of the business.
After spending more than $1.4 billion building a UK arm four years ago, most of the value has been lost.
More than $700 million has gone in write-downs and one-off costs on these businesses.
Despite reassuring the market a couple of months ago that no more charges of write-downs would be needed in the US, that’s what has happened to IAG.
"Insurance Australia Group (IAG) today announced that due to a significant deterioration in UK claim experience, in particular bodily injury claims, it had conducted a further independent actuarial review of its UK business," the company said yesterday.
"As a result, in FY10 the Group expects to recognise an associated one-off, pre-tax charge of approximately $365 million and to report a full year insurance margin of 6.0-7.0%, down from previous guidance of 9.5-11.0%.
"The Group has also announced FY11 insurance margin guidance of 10.5-12.5% reflecting confidence in the continued underlying improvement in its overall business.
"The anticipated $365 million charge in FY10 mainly relates to claim reserve strengthening, and includes approximate $60 million net charge associated with a new reinsurance arrangement to limit
"The anticipated $365 million charge in FY10 mainly relates to claim reserve strengthening, and includes
"An approximate $60 million net charge associated with a new reinsurance arrangement to limit
"Exposure to further claims deterioration in the UK. In addition, the Group expects to recognise a write-down of goodwill and intangibles associated with the UK business of approximately $86 million."
IAG’s CEO, Mr Michael Wilkins, said in the statement that the company had previously highlighted an increase in the cost of bodily injury claims relating to the 2007 and prior underwriting years, "however, the latest actuarial review has confirmed the scope of the issue is greater than originally anticipated".
“As we’ve flagged for the past 12 months, the increase in bodily injury claims is a problem confronting the entire UK motor insurance industry.
"In light of this and a significant deterioration in claim payments in the opening months of calendar 2010, a further review of our UK claim reserves was undertaken. This has revealed that a significant revision to our reserves is required.
"The deterioration now extends to underwriting years since 2007 and impacts most classes of motor business.
“Our immediate priorities have been to ensure our UK business is appropriately reserved, our exposure to this issue is limited through reinsurance, and that we have an appropriate programme of remedial actions,” Mr Wilkins said.
It will be another long haul for IAG to repair the damage from this shock.
