IAG holds firm despite $65m hit

INSURANCE Australia Group (IAG) is sticking to a key earnings forecast for the year, despite taking another $65 million hit from the latest earthquake aftershocks in Christchurch, New Zealand.

By InvestSMART · 1 Jul 2011

By InvestSMART ·
1 Jul 2011

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INSURANCE Australia Group (IAG) is sticking to a key earnings forecast for the year, despite taking another $65 million hit from the latest earthquake aftershocks in Christchurch, New Zealand.

The insurer expects to receive claims totalling $115 million arising from the June aftershocks, but $50 million of that will be covered by reinsurance. As a result, IAG's natural peril claim costs for the year to June 30 have risen to an estimated $600 million. It had originally budgeted for $435 million at the beginning of the 2010-11 financial year.

Most of these costs relate to the Christchurch earthquakes, cyclone Yasi and the Queensland floods.

The latest costs have not altered the insurer's forecast of a full-year insurance margin of between 8 per cent and 10 per cent, and for gross written premium growth of between 3 per cent and 5 per cent, it said yesterday.

The chief executive, Mike Wilkins, said the commitment to the forecasts reflected a larger release of insurance reserves, now expected to be more than the $228 million reported in 2009-10.

Mr Wilkins said the reserve releases would be higher than expected because of favourable outcomes in long-tail insurance classes - insurance lines that typically involve a long delay between collecting premiums and settling claims, such as workers' compensation and compulsory third-party insurance.

A Goldman Sachs' analyst, Ryan Fisher, said the latest claims bill was "in the ballpark" of expectations.

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Frequently Asked Questions about this Article…

What was the financial impact on IAG from the recent Christchurch aftershocks?

Insurance Australia Group (IAG) took a $65 million net hit from the June Christchurch aftershocks. The insurer expects $115 million in claims from those aftershocks, with $50 million of that covered by reinsurance, leaving a $65 million net cost.

How have IAG's natural peril claim costs changed for the year to June 30?

IAG's estimated natural peril claim costs for the year to June 30 have risen to about $600 million. That compares with an original budget of $435 million set at the start of the 2010–11 financial year.

Will the extra claims from Christchurch change IAG's earnings guidance?

No. IAG has stood by its full-year guidance despite the extra claims. The insurer reiterated its forecast of an insurance margin between 8% and 10% and gross written premium growth of between 3% and 5%.

How is IAG offsetting the higher natural peril claim costs?

IAG said the ability to stick to its forecasts reflects a larger release of insurance reserves than previously expected. Reserve releases are now expected to be more than the $228 million reported in 2009–10, helped by favourable outcomes in long‑tail insurance classes.

What do you mean by 'long‑tail' insurance classes and why do they matter to IAG?

Long‑tail insurance classes are lines where there is a long delay between collecting premiums and settling claims, such as workers' compensation and compulsory third‑party insurance. IAG reported favourable outcomes in those classes, which increase reserve releases and help offset current natural peril costs.

Which natural disasters have driven IAG's higher claim costs this year?

Most of the higher natural peril costs relate to the Christchurch earthquakes, Cyclone Yasi and the Queensland floods, according to IAG.

How have market analysts reacted to IAG's latest claims bill?

A Goldman Sachs analyst, Ryan Fisher, said the latest claims bill was "in the ballpark" of expectations, indicating the impact was broadly within what some analysts had anticipated.

What should everyday investors take away from IAG's update on claims and guidance?

The key takeaways are that IAG faced a $65 million net hit from Christchurch aftershocks and has raised estimated natural peril costs to about $600 million, but the company has maintained its full‑year margin and premium growth guidance. Management points to larger reserve releases—supported by favourable long‑tail outcomes—and reinsurance cover as reasons it can uphold guidance. This summary is based only on the company update; it is not investment advice.