Insurance Australia Group announces expected results

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Insurance Australia Group Limited (IAG) has announced its expected result for the six months to 31 December 2010. Bearing in mind expected first half 2011 results are based on preliminary results for the six months to 31 December 2010, the insurer expects to report an insurance profit of $470 million (1H10: $488m). This represents an insurance margin of 12.7% (1H10: 13.4%). Gross written premium (GWP) of $3,936 million is expected (1H10: $3,863m), which equates to underlying GWP growth of 3.2%.

IAG’s Australian and New Zealand businesses, which represent more than 90% of the Group’s GWP, delivered a strong performance during the first half.

IAG Managing Director and CEO Mike Wilkins said, “Our largest businesses, in our home territories – Australia Direct, CGU and New Zealand – produced a collective insurance margin of 17.8%, up from 14.4% in the previous corresponding period. This reflects ongoing improvements in underwriting disciplines and expense management across all three businesses. Top line performance of these businesses has also been pleasing, with collective underlying GWP growth of 6.3% derived from a combination of volume and rates. While natural peril activity during the half was significant, our net claim costs were lowered by reinsurance protections. A key priority of our strategy has been to improve the performance of our businesses in Australia and New Zealand, and I am pleased to say we’re delivering on that objective.”

Countering this strong performance, the Group’s result was adversely affected by a greater than expected insurance loss of $121 million from the UK operation.

“We have made progress during the period in remediating our operation in the UK, but I’m disappointed to report that bodily injury claim inflation has continued to affect the local industry, and has exceeded our previously held expectations. This, coupled with rate increases taking longer than anticipated to emerge in non-private motor classes, has contributed to a greater than expected loss for this business,” Wilkins said.

“The adverse development reinsurance cover taken out in June 2010 in respect of underwriting years ended on or before 31 December 2009, has provided considerable protection to this result. However, the higher than anticipated claim inflation has led to an $18 million strengthening of prior period reserves in respect of the calendar 2010 underwriting year, and the recognition of a $40 million liability adequacy test expense. In addition, we recorded $11 million in natural peril claim costs from the harsh UK winter weather.”

“The remedial actions we’ve been undertaking since June 2010 have delivered early signs of improvement, and we are accelerating these actions. We’ve already achieved rate increases of up to 20% across the private motor books – both direct and broker-sourced – and we’re now implementing further significant rate increases across the broader portfolio,” he said.

“We have exited more than 230 unprofitable broker relationships, and have stopped writing all private motor, externally sourced aggregator business. We will continue to exit other poorly performing business areas or distribution relationships over the coming months. Management information systems have been considerably improved and claims practices upgraded. In addition, in light of the further deterioration in bodily injury claim inflation in the UK, the Group has entered into a reinsurance arrangement in respect of the underwriting year ended 31 December 2010, providing
protection against $100 million of claims deterioration, commencing approximately $25 million above the currently reserved position,” Mr Wilkins said.

Other features of the Group’s expected first half insurance profit include:
1) Natural peril claim costs of $134 million (1H10: $121m), net of reinsurance recoveries, in line with guidance given on 13 January 2011;
2) Prior year reserve releases of $103 million (1H10: $80m); and
3) A negligible impact from credit spreads (1H10: $28m benefit).

Net profit after tax of $161 million is expected for the period (1H10: $329m), with the decline attributable to an impairment of UK goodwill and intangibles of $150 million and the non-recognition of tax benefits in respect of the UK operating losses.
The Group expects to pay an increased interim dividend of 9.0 cents per share (cps) fully franked (1H10: 8.5 cps), which represents approximately 52% of cash earnings.

IAG updates its claims experience related to severe weather and natural peril events in Australia and New Zealand

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