Shares of Insurance Australia Group fell sharply on Friday after the company dropped its final dividend for the 2019-20 year after earnings collapsed in the second half to produce a 70% slump in profits for the full 12 months to June 30.
The shock announcement on Friday came two days after rival insurer, QBE revealed a $US750 million (about $A1 billion) interim loss, but made no comment on a dividend.
IAG blamed higher natural disaster costs and the impact of COVID-19 as profit margins fell short of its prior guidance.
The company pre-released unaudited financial results for the 2019-20 year, saying the second half included natural disaster claims, volatile investment markets, and the lower premium revenue because of the pandemic.
IAG said it expected cash earnings of $279 million for the full year. That would preclude a final dividend for the year because the 10 cents a share interim paid earlier in the year met the payout target for the lower profit.
Seeing the company reported earnings of $283 million in the first half of the year, the second half saw a loss of around $4 million.
IAG said its insurance margin would be about 10%, compared with prior guidance of 12.5 to 14.5% due mainly to natural disaster costs, reserves being set aside, and negative impacts from volatile credit markets.
“We have experienced an immensely challenging second half to the 2020 financial year, characterised by severe natural peril activity, the disruption caused by the COVID-19 pandemic to our people, customers and suppliers, and the marked volatility in investment markets which has adversely impacted our results,” CEO Peter Harmer said in Friday’s update
Mr. Harmer said the weakness in its insurance margin in the second half was due to a combination of weaker investment returns, higher reinsurance costs in response to higher natural peril costs, and deterioration in some commercial insurance loss ratios.
Mr. Harmer said the outlook was “unusually uncertain” due to the impact of COVID-19, and it would therefore not provide guidance for 2020-21.
The company will still announce its full-year results on August 7.
IAG said it thought coronavirus would have a “modestly negative” impact on its gross written premium revenue, which was about $80 million lower between March and May
In the detailed update, IAG outlined a series of negative factors that have impacted its 2019-20 performance:
It said it faced “net natural peril claim costs of $904 million, compared to updated guidance provided in February 2020 of $850 million, following higher than anticipated attritional perils experience in the final quarter of the financial year;”
As well there was prior period reserve strengthening of $48 million (FY19: net reserve releases of $126 million) driven by adverse development of some Australian long-tail reserves;
As well the company saw a negative credit spread impact of $46 million (FY19: $6 million negative); and a broadly neutral impact from overall estimated COVID-19 effects;
There was also a pre-tax loss from fee-based business of $23 million (FY19: loss of $9 million);
And IAG saw a pre-tax loss on shareholders’ funds’ income of $181 million (FY19: profit of $227 million), compared to a previously indicated year-to-date loss of approximately $280 million at the end of April.
On top this there is a higher pre-tax customer refund provision of $246 million for multi-year pricing issues (1H20: $150 million), included in the net corporate expense line;
These negatives were partially offset by a total profit after tax of $326 million on the sale of IAG’s 26% interest in SBI General Insurance Company in India, which completed at the end of March 2020. The bulk of this profit is reflected in the net corporate expense line.
It was also benefiting from lower motor insurance claim costs, while it took a $100 million provision for COVID-19 impacts including claims on landlord insurance and business interruption insurance policies.
IAG shares ended the day down 7.8% at midday on Friday at $5.32.
