If you had to pick one result from the 2,000 or so interims and finals we are seeing at the moment that best illustrates the vagaries of modern business life, but also how companies of all sizes have to guard against sudden, unexpected events, then Insurance Australia Group is the one.
It is a big insurer in New Zealand, especially in general lines, such as cars and property protection for business. That puts it directly in the line of fire after this week’s second quake like few other companies (Suncorp is another).
A week ago IAG surprised the market with news of more losses in its troubled UK business, and provisions which cut the expected profit in half to just $161 million, from the $329 million earned in 2010.
The market went what at the $150 million in write-downs in the UK and gave the management a ticking off.
But they were comforted by the strong performance that IAG was getting from its Australian and New Zealand business and expectations this would continue in the June half year.
Then the second Christchurch earthquake happened on Tuesday and the solid performance of the Australian and New Zealand business went out the window.
IAG cut its insurance margin this year to 8-10% from its previous 9-11% range in the wake of the Christchurch quake. IAG had been hoping for an insurance margin for the 2011 financial year of around 12.5% last July.
IAG described the event as a "second earthquake" and said it was exposed to a maximum $40 million in claims stemming from the quake in New Zealand’s second-largest city, with reinsurance covering claims beyond that total.
That cap on claims won’t be any good if the quake is classified as an aftershock. If it is an aftershock and not a second, separate quake in the minds of the big reinsurance groups, then IAG and the Earthquake Commission (and other insurers such as Suncorp) will be up for more payouts and bigger losses.
IAG is one of New Zealand’s biggest insurers, selling general insurance there through its State and NZI brands. It and Suncorp sell mostly to business. NZ’s Earthquake Commission covers private houses and land.
Land costs will be a big problem because of the so-called liquefaction (that’s when the soil and sediments under the ground combine would ground water and become mud or sludge). It was a big surprise in the first quake (and a cause of claims) and was a feature of Tuesday’s quake.
Suncorp’s CEO, Patrick Snowball described it as a ‘second earthquake’ but admitted the precise nature of the quake was not certain (Suncorp reported a 39% fall in profit as it was hammered by the floods in Queensland and other disasters).
Yesterday IAG formally reported its 2010-11 interim result and revealed that it had stopped writing new earthquake insurance policies in the Christchurch area to give itself some breathing space in the wake of this week’s second rattler in six months.
IAG chief executive Mike Wilkins said the move was standard practice across the industry following major events.
He said insurers stopped writing new earthquake cover across parts of the South Island of New Zealand for several months in the wake of the September 4 quake and only had recently started to provide cover again.
“It’s typical when you have most natural perils you tend to give yourself some breathing space.
"We had recommenced writing earthquake exposure in the south Island of New Zealand particularly in the Canterbury area, but we will now wait for some stabilisation before we continue to do that,” Mr Wilkins said at a media briefing.
IAG shares fell 4c or 1% to $3.63.
Mr Wilkins naturally wants investors to look through the second quake and the poor UK results and focus on the way the Australian and New Zealand businesses are going.
He said yesterday IAG’s local businesses were in good shape, delivering solid margins, even as payouts linked to natural disasters were starting to rise.
If the $40 million cap on new quake claims from NZ remains in place, then IAG’s bill from cyclone Yasi, the severe storms and flooding in Queensland, NSW and Victoria and the bushfires in Western Australia will reach $540 million.
That includes $134 million of claims from natural disasters in the six months to December 31. Despite those claims, the Australian and NZ businesses of IAG had an insurance margin of more than 17% in the first half, that’s very healthy.
Some analysts have forecast the damage bill from New Zealand’s earthquake could exceed $US12 billion, making it one of the most costly natural disasters for global insurers since 2008. The first quake cost the insurance industry $US5 billion.
