Insurance Australia Group (IAG) has reported an attributable first-half profit of AUD579m, down from AUD642 in the same period last year, on premium revenue of AUD5.81bn, up from AUD4.89bn in the3 sixe months to December 31 2013.
Outwards reinsurance premium for the half was AUD651m, up from AUD565m. Reinsurance and other recoveries revenue rose to AUD1.43bn, from AUD905m. This increase was mainly attributable to the increase in the Christchurch earthquake reserve estimates in New Zealand.
Underwriting profit slumped to AUD266m, from AUD671m in H1 2013/2014.
The interim dividend was unchanged at 13¢ a share.
IAG said that it had produced "a sound operating performance in an increasingly competitive environment", noting that the integration of the former Wesfarmers business, plus the implementation of a new operating model in Australia, were progressing according to plan.
Gross written premiums (GWP) for the half were up 17.1% year on year because of the inclusion of Wesfarmers business in the figures for the first time. Without this, GWP was relatively flat. IAG said that this was influenced by an "ongoing relative absence of input cost pressures, resulting in minimal cause for premium rate increases; a higher level of competitive pressure in commercial lines in both Australia and New Zealand, and modest volume growth in personal lines in an increasingly competitive environment.
The lower reported insurance profit was attributed to higher losses from natural perils (net of reinsurance) and lower levels of reserve release.
Net natural peril claims costs for the first half were AUD421m, up from AUD335m in the first half of 2013/2014, and AUD71m higher than the related allowance. The Brisbane storm event of November 2014 added AUD165m to losses.
Prior-year reserve releases fell to AUD92m, equal to 1.8% of net earned premiums, from AUD187m (4.3% of NEP) in the corresponding period last financial year. The underlying insurance margin declined to 13.3%, from 13.7%.
At the end of the current half IAG materially strengthened its gross claim reserves for the 2011 financial year, with the majority of strengthening relating to the February 22 2011 quake in Christchurch. The strengthening was attributed to an increase in forecast repair and rebuild costs; the continued notification of new household claims that are in excess of the Earthquake Commissions NZD100,000 limit, and "a series of adverse court judgements which have affected the insurance industry over the past six months".
IAG warned that gross claim reserves for the February 2011 event "now stand close to the applicable reinsurance limit of NZD4bn", while noting that the loss estimates for the other major earthquake events were well below their respective reinsurance limits.
IAG also revealed that on July 1 last year it had entered into an adverse development cover (ADC) in respect of the Personal Insurance division's compulsory third party (CTP) portfolio, which provided protection for 30% of any reserve deterioration above the central estimate for losses incurred before June 30 2013. IAG quit the Queensland CTP market on January 1 2014.
The cumulative effect of IAG's quota share and ADC agreements, which are with the same counterparty, is to reduce IAG's regulatory capital requirements by some AUD150m, of which AUD90m was achieved by the ADC deal.
While Personal Lines were felt to have performed relatively well, the addition of the lower-margin Wesfarmers to the Commercial portfolio, a cyclically softer market, and lower reserve releases, all served to reduce the bottom line, despite a 44% increase in the top line. The insurance profit fell to AUD102m, from AUD190m in the first half of 2013/2014.
Looking ahead, IAG said that its strategic priorities were to maintain a market-leading position in personal and commercial insurance in both Australia and New Zealand, and to "drive customer-centricity". However, it observed that competition was increasing, and as a result it expected GWP growth for the full year to be at the lower end of the 17% to 20% range it had previously forecast. It anticipates an insurance margin of between 13.5% and 15.5% for the year to June 30, based on the assumption that natural disaster claims net of reinsurance will reach AUD700m.
The markets did not take the numbers well, with IAG's bottom line missing analysts' expectations. The share price was down more than 8% to AUD5.85 at the close.