Insurer IAG sees huge drop in NZ profit

by Maryvonne Gray 17 Feb 2016

Insurer IAG sees huge drop in NZ profit

The New Zealand division of Australian insurer IAG has revealed a ‘significant’ drop in insurance profit, reporting AU$11 million for the financial year to 31 December compared with AU$193 million in 1H15.

The company said the massive reduction was down to the NZ$150 million strengthening of its risk margin relating to the February 2011 Canterbury earthquake and stressed that the underlying margin was strong.

Other factors also played a part in denting the profit figure, including increased pressure on intermediated commercial lines in continued soft market conditions.

The tough market conditions, which were experienced in both New Zealand and Australia and were described by IAG Group CEO Peter Harmer as ‘the most competitive conditions in almost four decades’, also prompted a 4.1% drop in Gross Written Premium (GWP).

In New Zealand this dropped from NZ$1,223 in 1H15 to NZ$1,174 in 1H16.
These figures were offset by a relatively benign natural peril activity, continued focus on pricing and underwriting discipline and the realisation of integration benefits from the Lumley acquisition.

IAG NZ delivered an underlying margin of 18.4% compared with 15.9% in 1H15.

The company’s NZ CEO, Craig Olsen, said: “The New Zealand business continues to deliver a solid underlying margin, as it balances customer affordability issues with high regulatory and reinsurance costs in a very competitive market.

“We’ve had to make some difficult decisions in order to maintain our underwriting disciplines.

“Despite this we believe we’ve made the right decisions to support the sustainability of our business in the longer term.”

Olsen said the GWP contraction was a consequence of increased competition and changing risk appetite by other participants in the market which was placing pressure on commercial product lines, especially commercial property.

He said strengthening the earthquake risk margin helped removed ongoing uncertainty around the ultimate cost of claims for the 22 February 2011 event and in conjunction with new adverse development cover taken out by IAG at a Group level established effective coverage of up to nZ$5 billion for that event.

However, the company acknowledged there remained a degree of uncertainty still as to the ultimate cost.

“That uncertainty attaches to:
  • The further notification of household claims that have exceeded the EQC’s NZ$100,000 residential dwelling limit;
  • Increased risk on flood and liquefaction vulnerability; and
  • Higher repair and rebuild costs.”
Completing the settlement of claims related to the Canterbury earthquakes remained a top priority with the rebuild program expected to be largely complete by the middle of 2016.

The company noted that certain shared properties, over cap claims from the EQC and claims subject to dispute or litigation may take longer to settle.

Other significant figures the company highlighted included that the intermediated business (including NZI, Lumley and financial institution partners) represented 61% of IAG’s GWP in 1H16, dropping slightly from 63% in 1H15.

Customer retention rates remained steady across intermediated personal lines products, where modest rate increases were applied to appropriately price for risk, the company said.

Meanwhile, IAG’s direct insurance business, consisting primarily of State and AMI, represented 39% of GWP in 1H16, up slightly from 37% in 1H15.

Olsen said: “The business remains focused on meeting customers’ needs and expectations by providing greater choice on insurance offerings, ensuring affordability issues are addressed and providing positive customer experiences.”

AMI achieved premium growth in its private motor book against a backdrop of increased competition from both existing and new competitors.

The company put this down to AMI strengthening its brand over the last six months, with improved new business growth evident following digital initiatives such as ‘quote and buy’, the ‘AMI Online Account’ and a social media presence through Facebook.

The company said State’s online channel also continued to grow.

The Group’s profits dipped to AU$610 million from AU$693 million in 2015 whilst GWP dropped from AU$5.6 billion to AU$5.5 billion and NPAT hit AU$466 million compared with AU$579 million at HY15.

Harmer said the business was pleased with the company’s performance despite the tough market conditions.

“We are pleased with the performance of our consumer businesses where we have been able to broadly maintain market share with limited movement on price – demonstrating the strength and resilience of our franchises,” Harmer said.

“In our commercial businesses we are prudently maintaining our underwriting discipline in the most competitive conditions in almost four decades.”

Harmer pointed to a series of changes in the past 12 months to make the business more agile and sharpen its customer focus would pay dividends in the future.

Reinsurance arrangements with Berkshire Hathaway designed to address earthquake and asbestos liabilities would also help reduce future uncertainty, he said, and would strengthen the Group’s overall risk profile.

The IAG Board has also announced it has appointed Elizabeth Bryan as its chairman, effective 31 March 2016.

Bryan will succeed Brian Schwartz who gave notice of his intention to retire from the Board at the company’s AGM in October last year.

This followed seven years as IAG chairman and 11 years on the IAG Board.