Australia’s IAG Expects Insurance Margin to Improve This Year

Insurance Australia Group Ltd. said it expects to deliver "a significant improvement" in insurance profit margin of between 10.5% and 12.5% in the 2011 fiscal year, after a bad year due to increased claims loss.

The nonlife insurer's insurance profit fell 4.3% to A$493 million (US$438 million) in the 2010 fiscal year ended June 30. The group's net profit declined 49.7% to A$91 million, according to IAG's financial statement. Its insurance margin stood at 7%, compared to 7.1% a year earlier.

"Our result was diluted by the impact of the unprecedented Melbourne and Perth storm in March 2010, which generated 75,000 claims and a net cost of A$210 million, as well as the one-off A$367 million charge recognized in our U.K. business following an increase in bodily injury motor claims," said Michael Wilkins, managing director and chief executive officer of IAG, in a statement.

Natural peril claim costs increased 2.7% to A$463 million in the 2010 fiscal year, above IAG's budgeted allowance of A$350 million, with a 1.6% impact on its insurance margin. In this fiscal year, IAG has increased its natural peril allowances to A$435 million due to increased catastrophes in the past year.

The reinsurance program is "an important part" of the group's overall capital management, with a limit on its catastrophe retention to a maximum of 4% of net earned premium, said IAG. The group's Australia-based captive reinsurer, IAG Re Australia, captures the reinsurance spending of its domestic business.

While the bulk of facultative reinsurance is passed to the external market, IAG said the group captures counterparty and regulatory exposures within a single entity. IAG Re Labuan, IAG's offshore captive reinsurer, underwrites almost 100% of New Zealand treaty business and a substantial amount from the United Kingdom and Asia.

In May, IAG established a third reinsurance unit in Singapore, IAG Re Singapore, which will commence underwriting from the group's international operations in the first half of the 2011 fiscal year.

IAG said the global financial crisis had little impact on its reinsurance costs, with additional capacity emerging, particularly from the Lloyd's and Singapore reinsurance market. There was "modest rate increase" for natural perils and little change for other business lines during the 2010 renewals, according to IAG.

In the 2010 fiscal year, IAG posted gross written premiums of A$7.78 billion, down from A$7.84 billion a year earlier. The group expects to achieve gross premium growth of between 3% to 5% in this fiscal year.

The group's focus is "to build on the strong performance" of its largest businesses in Australia and New Zealand and to "restore profitability" in the United Kingdom, while it continues to pursue growth opportunities in selected markets, particularly Asia, said Wilkins.

In the United Kingdom, Wilkins said "our remedial action program is under way," following the substantial full-year insurance loss. The insurer plans to increase premium rates up to 20% across most business classes, to exit unprofitable broker relationships and to strengthen underwriting and actuarial resources. IAG expects to post a "modest insurance margin" in the 2011 fiscal year, with a return to more normal levels in subsequent years.

In Asia, IAG said the group's "immediate growth strategy is based on selected markets of Thailand, Malaysia, India and China." In the 2010 fiscal year, total regional support and development costs increased by A$2 million, which included establishment costs for a joint venture with State Bank of India.

The full launch of SBI General in India, set for the end of this year, will be a key area for the 2011 fiscal year, said IAG. In China, IAG will continue to "purse dialogue with potential insurance partners."

While underlying performance in Thailand and Malaysia will remain strong, IAG said there is some "uncertainty around growth levels in Thailand" due to ongoing political risks.

In the 2010 fiscal year, IAG's combined ratio stood at 100.9, compared to 103.6 a year earlier. The group's loss ratio was 71.8, down from 74.2 a year ago.

IAG has appointed Brian Schwartz as its chairman to replace James Strong. Schwartz has been a director of IAG since 2005 and deputy chairman since November 2009.

(By Iris Lai, Hong Kong bureau manager: [email protected])