IAG has reported a modest FY16 insurance profit of $1.18 billion, marking a 6.8% increase on FY15’s $1.10 billion result.
The Australian insurer said this equated to a reported insurance margin of 14.3%, and described it as a ‘sound result’ in light of a relatively flat gross written premium, which reflected the challenging operating conditions in the Australian and New Zealand commercial markets.
The company also announced a $300 million off market share buyback, which it said reflected the company’s strong capital position.
Gross written premium (GWP) was $11.37 billion, which was a 0.6% fall from FY15 ($11.44 billion).
Net profit after tax was $625 million, down 14.1% on FY15 ($728 million).
New Zealand, which contributed 19.0% of Group GWP, was said to have performed well, registering a strong underlying margin of 16.9%, despite the increased pressure on the commercial side of its business.
A lower reported margin of 8.6% (FY15: 10.8%) included the increased risk margin in respect of the February 2011 earthquake event.
However, modest premium growth in direct personal lines was more than offset by the tougher market conditions in the commercial segment, resulting in a 3.7% decline in reported GWP.
The company said its overall profitability remained strong with an underlying margin of 14.0% (FY15: 13.1%) which included a positive benefit from the
Berkshire Hathaway quote share arrangement of 250bps.
IAG managing director and CEO Peter Harmer said he was pleased with the solid performance of the Group and felt confident as it entered FY17.
“We’ve seen solid growth and strong profitability in our personal lines in Australia and New Zealand, primarily driven by GWP growth for home and motor.
“Our commercial businesses in Australia and New Zealand have withstood continuing price pressure and maintained their strict underwriting discipline which has resulted in lower business volumes as we exited unprofitable business – but we are encouraged by growing signs of rate improvement,” Harmer said.
Asia represented an important source of long term growth for IAG, Harmer said, with the company’s proportional GWP (excluding China) growing 7.5% to $757 million, with India in particular performing well.
“The Berkshire Hathaway quota share arrangement continues to perform well for us, reducing earnings volatility and releasing capital,” Harmer added.
IAG said its reported margin of 14.3% for FY16 (FY15: 10.7%) was in line with the updated guidance announced in February 2016 and included:
- Net natural peril claim costs of $659 million (FY15: $1.05 billion). This exceeded allowance by $59 million following a higher than originally anticipated loss from the east coast low in June 2016;
- An adverse credit spread impact of $37 million, compared to a favourable effect of $33 million in FY15
- Higher than expected prior period reserve releases of $207 million – equivalent to 2.5% of net earned premium (NEP) – up from $167 million (1.6% of NEP) in FY15. This reflected mainly compulsory third party (CTP) releases and an offsetting NZ$150 million increase to risk margin relating to the February 2011 Canterbury earthquake, recognised in 1H16.
IAG said it expected GWP for FY17 to be relatively flat, and expected modest growth in short tail personal lines in Australia and New Zealand as well as CTP volume growth from IAG’s entry into the South Australian market from 1 July 2016.
These were expected to be offset by continued tough conditions in commercial markets and an approximately $130 million reduction in GWP from the sale of Swann Insurance’s motor vehicle dealership business in August 2016.
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