IAG NZ profit slides 38% as competition for business customers drives down prices

Friday 19th August 2016

Insurance Australia Group's New Zealand division posted a 38 percent slide in annual profit as rampant competition for commercial customers drove down prices and as the country's biggest general insurer faced a higher risk margin on the Canterbury earthquakes.

Sydney-based IAG's New Zealand unit includes Lumley Insurance, NZI, AMI and State brands on this side of the Tasman. The local division posted an insurance profit of A$135 million in the 12 months ended June 30, down from A$216 million a year earlier. Gross written premiums (GWP) fell 3.7 percent to A$2.18 billion, with business GWP dropping 8 percent in kiwi dollar terms as heightened competition saw insurers discount commercial product lines.

Weaker margins in the second half "reflected the cumulative effect of competitive pricing pressure in the commercial market, as well as higher claim costs associated with the seasonally wetter months of May and June," IAG reported in its results. "Harsher competitive conditions continued to place pressure on commercial product lines, especially property where IAG experienced item loss and rate reductions."

Across the wider IAG group, profit fell 14 percent to A$625 million on a 0.6 percent decline in GWP to A$11.37 billion, with both Australia and New Zealand experiencing challenging conditions. The board declared a fully-franked final dividend of 13 Australian cents per share, taking the annual payment to 26 cents, down from 29 cents a year earlier. It also announced a A$300 million off-market share buyback which is expected to be completed in mid-October.

IAG's New Zealand grew its consumer GWP 2 percent in local currency terms, with gains in auto-insurance policies. The insurer's claims experience in personal lines was higher than expected in the year with an expanding population and cheap petrol leading to more people on the roads, and IAG said it was taking a number of actions to cope with that trend "including increased excesses and greater use of preferred supplier networks."

The insurer's New Zealand profit was hit by NZ$150 million increase in the risk margin for the 2011 Canterbury earthquake, which it recognised in the first half of the year. IAG settled NZ$5.7 billion of quake-related claims as at June 30, accounting for 93 percent of all claims.

IAG's New Zealand reinsurance cost more than doubled to A$623 million in the year while its underwriting expense dropped by 31 percent to A$252 million due to the quota sharing arrangement with Berkshire Hathaway that kicked off on July 1, where the US firm takes 20 percent of IAG's premiums and pays 20 percent of its claims. Net claims expense dropped 18 percent to A$1.02 billion.

A 25 percent fall in commission expenses to A$181 million was partly due to quota sharing arrangements and also from lower volumes of business written through third parties.

IAG expects flat GWP in 2017 with competition likely to limit increases in personal lines and maintain pressure on business policies. Still, the insurer expects underlying profitability to remain strong.

The ASX-listed shares last traded at A$5.85 and have gained 7.2 percent so far this year.

(BusinessDesk)

BusinessDesk.co.nz

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