Bad weather and the continued drag of the unwanted insurance business in Britain have combined to hurt Insurance Australia Group’s interim profit more than the impact of Australia’s spate of floods in late 2010.
The insurer surprised yesterday by warning that the December 30 half year profit (to be announced next week) will be half of the $329 million it recorded 12 months ago.
IAG said interim net earnings will be $161 million.
On top of that IAG also cut its insurance earnings guidance for the rest of 2011, but maintained the promised higher 9c a share interim dividend. That’s up half a cent from the 8.5c in the previous corresponding half year.
The market digested the surprises and sold the shares down 5% at one stage yesterday before they closed off 4% at $3.63, a drop of 15c on the day.
What disappointed the market was the way the continuing problems in the UK (which are supposed to be being slowly unwound) again hurt the company, undermining a solid recovery in the performance of the Australian and New Zealand insurance business and its profitability.
If anything that’s a black mark against CEO, Mike Wilkins who replaced Michael Hawker who had spent $1.7 billion taking IAG into the US insurance market.
Mr Hawker stepped down when the losses from the UK got too much for big investors and the board, now Mr Wilkins is under pressure to fix the problem in Britain once and for all.
That 50% drop in the net profit to $161 million was down to an impairment charge and intangibles amounting to $150 million, much of it accounted for again by the poorly-performing British operations.
The Australian division, led by NRMA Insurance and CGU, managed to offset some of that fall albeit its insurance profit margin dropped back slightly from 13.4% to 12.7%, which isn’t a bad outcome given the impact of floods in some states in the second half of 2010.
While the pre-tax profits from its main insurance businesses will be broadly in line with a year ago – $470 million this time compared to the $488 million in the December, 2009 half year, – the UK black hole has again swallowed a large chunk of earnings.
Mr Wilkins has been cutting back in the UK to try and reduce the red ink, so the latest insurance losses of $121 million were greater a bit of a shock to some in the market.
IAG said yesterday the UK continues to be plagued by industry-wide higher inflation claims in bodily injuries and has yet to see any benefit of increased premiums in its non-private motor business to compensate for those costs.
The loss also includes an additional $40 million of higher liability costs and $11 million of claims arising out of the heavy snow that affected Britain before and after Christmas.
As for the severe flooding that hit Australia over the six months to December 31 2010, IAG said it had incurred natural peril claims of $134 million – $13 million larger than a year ago.
But that was in line with what the company expected in early January and not a surprise.
As a result, the group’s insurance margin would decline to 12.7% from 13.4% a year earlier, while gross written premium, the industry’s standard measure of insurance revenue, was up slightly to $3.94 billion from $3.86 billion.
The lower than expected first half profit meant IAG also had to lower its full year insurance margin guidance to between 9% and 11% from the previous guidance of 10.5% to 12.5%.
This will take into account $500 million of claims arising out of Cyclone Yasi and the flooding in Queensland and Victoria since the start of 2011. That’s $65 million more than budgeted for by IAG.
So far IAG’s bill has totalled $300 million but this will rise once the floods and severe storms in Melbourne and the bushfires in Perth are included.
The guidance also accommodates $40 million of additional charges in reinsurance cover for the UK division and an expectation that full year reserves won’t exceed the $228 million recorded in the last financial year.
The result was boosted by a 20% rise in additional releases from prior year reserves of $103 million. But there was also no benefit from credit spreads on the returns on its investments after these gave a $28 million boost in the December, 2009 half year.
The higher 9 cents a share interim payout is equal to 52% of cash earnings, unlike Leighton where the reduced dividend of 60c was 84% of eps of 72c a share.
