Like Suncorp in 2009, Insurance Australia Group will have to dip into reserves to pay its full-year dividend after the insurer yesterday confirmed a July earnings downgrade and reported a miserable profit.
Companies that incur loses now can’t pay dividends (hence Fosters not paying a final), but IAG managed to make just a small profit after the mostly non-cash write-downs.
It’s only an accounting move, but IAG didn’t earn enough after tax to meet its dividend payout, so it will have to be accounted for from elsewhere in the accounts, from a reserve for retained profits, for example.
The downgraded guidance and big losses and write-offs on its UK businesses, produced a profit of just $91 million yesterday, down from the depressed $181 million in 2009.
Revenue dipped 2% to $9.384 billion from $9.591 billion in 2009.
Cash operating earnings from its main insurance business fell to $493 million from 2009’s $515 million as its insurance margin was hit by bad storms in Melbourne and Perth earlier this year.
But like results in 2008 and 2009, IAG was forced to depend on factors like reserves releases to bolster the weakened bottom line.
The insurer said that the 2010 result included "Reserve releases of $228 million excluding the UK strengthening in the second half (FY09: $215m); A $53 million reduction in running yield on technical reserves, owing to lower average interest rates and Investment income on shareholders’ funds of $96 million (FY09: $39m loss)."
Without these moves, it is likely the group would have been forced to declare a loss.
Suncorp was forced into a couple of years of reserves releases to make up for an earnings drain from underwriting and other insurance related losses. But those stopped in the year to June 2010, according to the company’s report this week.
Having taken large write-downs and losses over the past two financial years (which saw senior management changed), IAG followed up with another one-off charge of $367 million to cover an increase in bodily injury motor claims in the UK.
That was forecast in its July update and shocked the market.
IAG shares edged 5c higher to $3.32, with investors apparently relieved there were no more problems in yesterday’s announcement to the ASX.
Final dividend was cut to 4.5c a share in an effort to preserve capital (just as Suncorp did in 2009 and in the year to June), from 6c a share last year.
Combined with the interim dividend, IAG is paying out a total dividend of 13c a share – 30% up on 2009’s depressed 10c a share payout, but boosted by the interim (no interim in 2009).
The 13c a share will cost IAG $270 million (it has 2.077 billion shares on issue) against $196 million in 2009 (1.96 billion shares on issue).
Even though it had cash earnings of $493 million, the accounting bottom line profit was $91 million, compared with the $181 million in 2009.
Incidentally there was a small shortfall in 2009 on the same basis, with net earnings of $181 million and a dividend payout of $196 million.
The company is obviously looking for a much higher profit this year to be able to impress shareholders and pay dividends from its after tax profit, as companies are supposed to do.
Chairman James Strong who has chaired the group over the past nine years stood down yesterday as signalled last November and has been replaced by existing director Brian Schwartz.
IAG forecast an insurance profit margin in the current 2011 year of between 10.5% and 12.5% against the backdrop of an anticipated rise in premium income of 3% to 5%.
From looking at QBE and Suncorp, the recovering Brisbane-based group seems to have had the stronger insurance result, even though it was hit by the same floods and storms that impacted IAG.
QBE is more internationally focused and it was hurt by the cost of things like the Chile earthquake, but more importantly lower investment income as it was squeezed by falling interest rates on its huge reserves (which are mostly in cash or near cash securities).
