Insurer IAG has revealed plans to cut about $250 million in operational costs over the next three years as part of its latest strategic plan. That’s a 10% cut in costs planned by the company, with the consolidation of a multiplicity of online platforms to three.
That’s cost cuts of more than $80 million a year and will include jobs shifted offshore from the insurer’s Australian and NZ operations – moves that were suggested in reports last month.
IAG chief executive Peter Harmer says the cuts are part of the company’s strategic themes of leading, or placing customer experiences first, and what he called “fuelling”.
“Fuelling means making the necessary changes to the way we operate – simplifying processes and systems, and optimising resources to be more efficient so we can invest in leading,” he said in a statement. accompanying the company’s strategy update yesterday (https://www.iag.com.au/sites/default/files/Documents/Announcements/Dec%208%20-%20IAG%20provides%20strategy%20update_0.pdf).
IAG also confirmed its expectation that the combination of the recent trans-Tasman storm and New Zealand earthquake events will result in a net claim cost of approximately $200 million.
That will be just under a third of the $680 million in disaster related claims the insurer says it has to finance before reinsurance kicks in. The figure for the net loss from “ natural perils is up from $680 million in 2015-16.
Mr Harmer said “IAG’s strategy supports the delivery of its through-the-cycle targets of a cash return on equity (ROE) equivalent to 1.5 times IAG’s weighted-average cost of capital, a top quartile total shareholder return, and compound earnings per share (EPS) growth of around 10%."
This strategy includes:
measures to further enhance the customer experience through better understanding and segmentation to drive anticipated business growth in line with the market of around 3-5%, in its core markets of Australia and New Zealand;
- higher growth from IAG’s focused strategy on chosen Asian markets;
- an optimisation program that will reduce gross operating costs by an annual run rate of at least 10%, or $250 million pre-tax, by the end of FY19; and
- benefits from ongoing innovation in capital management.
IAG’s optimisation program, which will simplify its operating model, is central to the reduction of gross operating costs over the next three years and includes:
- partnering with global insurance and business process experts to simplify IAG’s processes and reduce complexity;
- consolidation of core claims and policy administration systems to reduce them from 32 to two platforms; and
- a simpler procurement model.
As previously indicated, in the event of surplus capital accruing, and subject to size and market conditions, the company’s preferred form of capital management is an off-market share buy-back, given its favourable effect on EPS and ROE, as well as the effective use of available franking credits.
IAG reaffirmed its guidance for the financial year ending 30 June 2017. The company expects gross written premium growth will be relatively flat with a continuation of modest rate-driven growth in short tail personal lines in Australia and New Zealand, while there are further encouraging signs of improvement in the commercial market in Australia. The company maintains its reported margin guidance of 12.5-14.5% with the following underlying assumptions:
IAG’s central support is the 20% quota share treaty (of gross written premiums) with Warren Buffett’s Berkshire Hathaway, and a shareholding of just under 4% held by Berkshire. That makes the insurer hard to takeover, and also provides high class reinsurance for the group.
The 20% quota share sees Berkshire taking 20% of IAG’s gross written premiums, and 20% of all claims. Combined with the shareholding of 3.7% it is an effective backstop for IAG and will allow it to look at capital management for shareholders on a more regular basis.
IAG shares rose 4.4% to $5.85, the highest the shares have been since August.
