Insurance Australia Group (IAG) confirmed yesterday that the warm dry weather across much of the East Coast and the absence of any large natural disasters (earthquakes, cyclones and storms floods) would generate record earnings for the year to June.
The general insurer, the country’s largest, yesterday said its full year profit margin expectations to its highest levels since the company listed on the Australian Securities Exchange in 2000.
IAG, which owns brands such as NRMA and CGU, says it now expects to report an insurance margin of 18% to 18.3% when it reports its annual results next month.
That’s up sharply from the previous estimate of 14.5% to 16.5%, and is the fifth consecutive time that IAG has upgraded its full year insurance margin guidance in the past year.
Despite that good news, the shares hardly moved, rising 2.1% to $6.17, just under the high for the past year of $6.25 reached in October of 2013.
IAG vs QBE 1Y – IAG lifts margins, profit expectations
“This reflects the relatively benign natural peril activity in the second half of the financial year, notably in Australia, and a more favourable financial impact from narrower credit spreads than previously anticipated. The underlying performance of the group has remained strong,” IAG boss Mike Wilkins said in a statement to the ASX yesterday.
IAG said its natural disasters claim expense was around $555 million for the year to June compared with a full year allowance of $640 million.
The company also benefited from a favourable credit spread impact of around $100 million, compared to the previous forecast of a positive contribution of $39 million.
IAG will also post reserve releases of just below 3% of net earned premium compared to a previous expectation of around 3%.
The raised insurance margins are based on a figure for net earned premiums of around $8.64 billion, which would be up on the $8.3 billion reported for 2012-13.
IAG also revealed the cost of the revamp it announced in its Australian businesses in May as the company prepares to merge the $1.5 billion Wesfarmers insurance acquisition into its fold.
The changes, which took effect from July 1, will see IAG book a $100 million restructuring cost of which $50 million will be recognised in the last financial year’s accounts.
IAG says it expects to post $90 million in annualised pre-tax benefits within two years as the new operating model takes hold.
The changes are likely to lead to job losses as IAG streamlines its operations into three divisions – personal insurance, commercial insurance and enterprise operations.
IAG now expects to realise an annualised pre-tax benefit of around $230 million and around $220 million in one-off costs over the course of the next two years, as the Wesfarmers merger happens progressively.
The only slightly negative part about yesterday’s update was the downgrading of growth in the company’s Gross Written Premiums – 3% instead of a range of 3% to 5%, which was the January forecast and the forecast before that for growth of 5% to 7%.
That would indicate there’s already premium discounting going on, which is understandable given the sharp rise in premiums across most insurance lines since the floods in Brisbane in 2011 and the earthquakes in Christchurch in 2010 and 2011, which lifted the company’s reinsurance costs.
The insurer is due to announce its full year earnings results on August 19.
