IAG reported lower margins, SBI divestment to bring over $300 million

IAG reported lower margins, SBI divestment to bring over $300 million

Insurance Australia Group (ASX:IAG), a major insurer in the country, has provided an update on the full-year guidance and first-half numbers.

Due to recent hailstorms, the insurer reviewed its full-year net natural peril claim costs and based on the expected results of the half-year, it has provided an update to the reported margin guidance for FY20.

IAG expects that reported insurance margin would be in the range of 14.5 per cent to 16.5 per cent as against the previous guidance of 16 per cent to 18 per cent.

It is noted that the first-half results of FY20 would incur a post-tax provision of $80 million related to customer refunds program. The provisional expense would be incorporated in the net corporate expenses, and it would not impact the reported insurance margin guidance for half-year and full-year 2020.

Customer Refunds to hit dividends by $80 million

For first-half, the $80 million provision includes refunds, interest and the costs of the remediation program. It is related to a specific multi-year pricing issue identified by the company, specifically on products where discounts were not applied to the premium for all customers who might have been eligible.

In September 2019, the insurer had reported the issue to the Australian Security & Investment Commission; it has made progress in identifying the root causes, and those customers who had been impacted would be refunded.

It was said that the provision would be excluded from the cash earnings and dividends calculation purposes.

Also read: Dreadful Bushfires: Australia’s AAA Rating Intact; Mortgage Arrears and Insurance Premiums Set to Surge

Recent hailstorms

In Melbourne, Canberra and Sydney, the hailstorms have impacted parts of cities, and it would be treated as one event under the insurer’s reinsurance arrangements.

According to IAG’s projected claim volumes and severity of damages, it expects that hailstorms would result in a cost of $169 million (post-quota share) before taxes, which is consistent with the maximum first event retention (MER), under 2020 reinsurance protection.

It was said that the company expects these hailstorms would not require any new reinsurance reinstatement in the calendar year 2020. After this event, the insurer’s MER is $135 million (post-quota share).

By 23 January 2020, the number of claims related to the hailstorm reached 28k, and this number is expected to increase, with residential and motor damage claims being the highest.

First-half results

IAG would be releasing the first-half results on 12 February 2020, and it expects the numbers to depict:

  • Around 1.4 per cent growth in gross written premium, consistent with guidance.
  • Insurance margin (underlying) of 16.9 per cent.
  • Loss from fee based business of $2 million.
  • Customer refund provision of $80 million.
  • Reported insurance margin of 13.5 per cent.
    • Net natural peril claim costs of $419 million
    • Lower than expected net reserve release of $5 million
    • A modestly favourable credit spread impact.

Also read: Three Resilient Insurance Businesses & Mixed Signals; IAG, QBE & SUN

FY20 Guidance

Considering the expected first-half results, the group has revised its FY20 guidance where it has reaffirmed the gross written premium growth of low-single digits and revised reported insurance margin guidance to a range of 14.5 per cent to 16.5 per cent.

It was reported that the decrease in the revised reported insurance margin guidance is due to:

  • A 50 bps impact from the reduction in prior period reserve release expectations to around 0.5 per cent of net earned premium, as against around 1 per cent of net earned premium in previous guidance.
  • An increase in net natural peril claim cost estimate of $715 million, as against $641 million in the previous guidance, which is resulting in 100 bps impact.

The 50 bps impact is due to higher than anticipated claim development across long tail classes compared to recent years, and the emergence of some large claim in these classes which was not expected by the insurer.

As a result, the insurer has undertaken reserve strengthening in several Australian long tail classes, and reserve releases are expected to constitute 1 per cent of the net earned premium in the second-half.

Due to recent hailstorm, the group has reviewed its assumptions for the net natural peril claim costs for the year FY20. Thus, increasing the assumption by $74 million to $715 million, and this includes:

  • Higher than anticipated net natural peril claims so far in FY20.
  • An assumption for additional sub-$100 million events over the ending months of FY20.
  • Allowance for FY20 based stop-loss catastrophe reinsurance cover that provides $101 million cover above $675 million (post-quota share).

The revised estimate of net natural perils cost in FY20 has assumed no more major events (i.e. over $100 million or higher) would occur before 30 June 2020.

And, FY20 YTD to 23 January 2020, the net natural peril claim costs are estimated around $608 million, which consists:

  • $419 million for the half-year ended 31 December 2019, with a slight increase compared to the indication of $400 million.
  • $160 million in net costs from the recent hailstorm events.
  • Around 20 million of attritional loss experience from 1 January 2020 to 23 January 2020.

It would need additional costs of $208 million, from 24 January to 30 June 2020, to exceed the revised full-year assumptions for net natural peril claims, before FY20 stop-loss protection.

Further, the group continues to anticipate a full-year loss from fee-based business of up to 50 million, as it would increase investment spending on data, artificial intelligence, innovation and the associated business being developed by the group.

Previously, the group has announced the sale of its 26 per cent stake in SBI General Insurance, which would result in profit after tax of minimum $300 million along with regulatory capital benefit over more than $400 million.

IAG expects that the transaction would be closed in the second-half of FY20, and recognised in the financial results for the second-half FY20.

On 24 January 2020, IAG last traded at $7.3, down by 5.44 per cent from the previous close.

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