Australia’s IAG Returns to Profit in Fiscal 2009

Insurance Australia Group Ltd. [86837] has returned to a full-year net profit of A$181 million (US$149 million) for the 2009 fiscal year ended June 30, after a net loss of A$261 million a year ago.

This improvement has not yet met the insurer's expectations. Last year, IAG was hit by volatility in investment markets, high natural perils claims costs, a slower than anticipated recovery in subsidiary CGU and disappointing first-half performance of the New Zealand unit.

"However, there is still more work to do. While our performance has improved, it's below the expectations we held at the outset of the year," said Michael Wilkins, chief executive and managing director of IAG.

The insurance group projected gross written premium growth of 1% to 3% and an insurance margin of 9% to 11% for the 2010 fiscal year starting July.

In the 2009 fiscal year, IAG reported a 0.6% increase of gross written premium income to A$7.84 billion. Its underwriting loss widened to A$265 million from A$40 million a year earlier. The insurance margin improved to 7.1% from 5.4%.

Natural peril claims costs were A$451 million for the year ended June, net of reinsurance, compared to A$502 million a year ago. IAG said overall natural claims costs exceeded related allowances by A$137 million in the 2009 fiscal year. Losses from the Victorian bushfires in February were capped at the maximum single retention of A$126 million under the insurer's reinsurance cover.

In the 2009 fiscal year, the nonlife insurer's loss ratio increased to 74.2 from 70.7. The group's combined ratio jumped to 103.6 from 100.6.

The group's reinsurance expense increased to A$485 million for the 2009 fiscal year from A$470 million a year ago. The rise largely reflected additional natural perils cover purchased from the beginning of 2008 calendar year, said IAG. The upper limit of the group's catastrophe program is A$4.1 billion.

As a result of volatile investment markets, Wilkins said the group's shareholders' funds returned a loss of A$39 million and credit spreads adversely affected insurance profit by A$13 million.

IAG reported an insurance profit of A$515 million in the year ended June, up from A$392 million a year ago. Australia Direct contributed the largest insurance profit, A$373 million, up from A$316 million.

The New Zealand unit reported no insurance profit in the 2009 fiscal year, compared with A$53 million of insurance profit a year ago. Asian business saw an improvement of insurance profit to A$9 million from a loss of A$11 million. IAG's business in the United Kingdom reported a surge of insurance profit to A$113 million from A$53 million.

The 2009 fiscal year was "a rebuilding year" for IAG, with the focus on core business in Australia and New Zealand, said the Australia-listed insurance group. In the U.K., the group narrowed its focus to a specialist motor underwriter. In Asia, the nonlife insurer continues to focus on growth opportunities in Malaysia and India.

In India, SBI General Insurance Co. Ltd., an nonlife joint venture with State Bank of India, is expected to roll out in the second quarter of 2010. IAG will initially have a 26% stake in the Indian venture, with an option to increase to 49% subject to regulatory lossening of the foreign direct investment limit.

IAG will invest 5.4 billion rupees (US$111 million) in the Indian venture, with no further capital requirement for at least four years. The new venture will initially focus on offering comprehensive nonlife business lines in India with the focus on corporate and small to medium-sized products, riding on SBI's bancassurance networks.

In China, a small IAG team is looking into joint venture opportunities. The insurer said "good progress" has been made in building up relationships with potential partners.

In the 2010 fiscal year, IAG said it expects hardening market conditions in most lines. Overall, improving outlook is driven by higher premiums, including the earned effect of rate rises implemented in the 2009 fiscal year.

"We'll also benefit from the changes we have made to our operations such as the significantly reduced exposures to the mass, private motor market in the UK," said Wilkins in a statement. The nonlife insurer aims to deliver a return of equity of at least 1.5 times the group's weighted average cost of capital.

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