IAG takes $280m coronavirus hit, warns on dividend

IAG has warned there is limited scope for it to pay a final dividend this year as its investments took a $280m virus hit.

NRMA is one of the insurance brands run by IAG

IAG has warned there is limited scope for it to pay a final dividend this year as its high-risk investments took a $280m hit from the coronavirus-induced market ­correction.

In an update to the market on Monday, Australia’s largest general insurer said its board would determine whether to pay a final dividend in August.

It comes after Australian Prudential Regulation Authority chairman Wayne Byres in April ­issued a directive to banks and insurers, ordering them to “seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer”.

“APRA expects ADIs and insurers to limit discretionary capital distributions in the months ahead, to ensure that they instead use buffers and maintain capacity to continue to lend and underwrite insurance,” Mr Byres said last month. Two of the big four banks have since suspended dividends, while insurer QBE went ahead with its final dividend payment just days after Mr Byres’ edict and NAB chose to pay a reduced dividend when it handed down its half-year numbers last week.

IAG, which runs a number of insurance brands including NRMA, CGU, SGIO, SGIC and Swann Insurance, retained its guidance of “low single digit” gross written premium growth for the year and a reported insurance margin of between 12.5 per cent and 14.5 per cent. Its margin guidance excluded an unrealised loss from the widening of credit spreads since the end of December, it said. By the end of March, this loss stood at about $100m pre-tax, but there had been a “moderate” narrowing of spreads in April.

IAG closed down 12c at $5.48

As at the end of April, the insurer’s investment income had taken a $280m pre-tax loss due to “the severe corrections witnessed in the second half of the financial year in equity and credit markets,” the insurer said.

“That return is a lot lower than we were expecting,” Morningstar analyst Nathan Zaia said. Before the update, he had factored in a $150m profit for the full year from IAG’s investment income. “I think the deterioration in probably their non-investment grade fixed-income portfolio has been worse than we expected,” Mr Zaia said.

Of IAG’s $4.5bn investment portfolio of shareholders’ funds, 49 per cent was invested in high-risk alternative and equity market assets in December.

“The allocation to alternative investments currently includes higher-yielding credit strategies, global convertible bonds and hedge funds,” the insurer said in its half-year update in February, before the market crash.

While 9 per cent of its portfolio was invested in risky junk bonds, a further 10 per cent was invested in BBB bonds, which are only one level above junk status.

The insurer on Monday said its allocation to growth assets had been slashed from 49 per cent in December to 30 per cent by April as the market rout knocked its investments and it revalued its alternative asset holdings. It also shifted funds to fixed interest and cash, it said. Mr Zaia warned that move would probably lock in some of the losses suffered in the correction. There wasn’t much hope of a dividend payment in the near term unless investment markets staged a strong rebound, he said.

Commenting on the market outlook, IAG warned of uncertainty over the impact of COVID-19, economic conditions and the direction of investment markets.

IAG’s shares fell as much as 4 per cent in intraday trade on Monday before paring the losses to close down 2.14 per cent at $5.48.