Insurance Australia Group posted a net loss of $427 million in the year, after it was hit by higher claim costs, a refund for refunds, and the company putting more cash into its reserves to cover extra ‘long tail’ insurance claims.
(Long tail claims are claims settled long after the policy has expired such as workers compensation, death, disability policies, and some business insurance policies)
The results included higher natural peril costs, as the company had previously warned, and an extra $81 million into its reserves for its commercial insurance lines (the long tail claims).
Last November, the insurer raised $750 million to help finance a $1.15 billion addition to its reserves to handle an expected surge in business interruption claims made as a result of Covid by small and medium business clients.
IAG moved to raise the new capital within days of insurers losing a test case appeal in the NSW Court of Appeal on the definition of a pandemic. An appeal to the High Court on that point was rejected in late June, though a separate test case is still underway covering the wording of other parts of these policies.
The company also took a $200 million provision for corporate expenses, which included money for compensation where customers had not been given the appropriate discounts on their premiums.
While IAG posted a loss, the smoothed measure of “cash earnings” was a $747 million profit, and IAG’s policy is to pay 60% to 80% of cash earnings as dividends. (That cash earnings figure excludes the $200 million provision and other one-off items)
CEO Nick Hawkins said the business had faced “challenges” and it had provided for these.
He said he expected an improvement in its underlying performance in the year ahead.
“Our underlying financial results for the year are sound and within expectations. However, we have had challenges with issues that have been identified and provisioned for in our preliminary results,” Mr Hawkins said.
“We have at our core a strong insurance business with trusted market-leading brands, and we have worked hard and acted decisively to put in place changes that address these challenges and enable us to better deliver to our shareholders, employees, customers and our communities.”
Despite Mr Hawkins’ upbeat commentary, the insurance nitty gritty in the preliminary figures reveals a lacklustre performance in the year to June, even before the expected claims under the BI policies kick in and the huge $1.15 billion provision starts being used.
Gross Written Premiums (GWP) grew 3.8%, including a second half growth rate of 3.9% and “negligible 2H21 GWP COVID-19 impacts”;
Net Earned Premiums (NEP) of $7.473 billion was up 1.5% from 2019-20, which was well behind inflation and just matched the 10% bond yield in the last six months.
The key measure of performance and profitability – the underlying insurance margin was 14.7% down from 16.0% in 2019-20, including a second half result of a weak 13.5% and down sharply from the 15.9% in the December half as the economy continued re-opening and people drove more and business activity stepped up.
The reported insurance margin was 13.5%, up from 10.1% the previous financial year (clearly the underlying figures more accurately reflect what happened in 2020-21).
The results in August will see IAG set its 2021-22 targets for GWP, NEP and the insurance margin.
