No guidance, dividend from insurer IAG after ‘immensely challenging” June half-year

Outlook ‘unusually uncertain’, making it important for IAG to maintain a strong capital position.

IAG Chief Executive Peter Harmer. Picture: Britta Campion / The Australian

Insurer IAG has scrapped its final dividend and declined to provide any guidance for 2021 after an “immensely challenging” June half-year.

Unveiling its preliminary full-year result ahead of its formal release on August 7, IAG flagged a net profit of $435m, down sharply from $1.08bn as first-half earnings of $283m tumbled to $152m in the second half.

Among the hits absorbed by the group was a $100m provision for extra claims related to COVID-19 that were considered to be “highly uncertain, sit within a wide range and estimated on a probability-weighted basis”.

Chief executive Peter Harmer said the outlook was “unusually uncertain”, making it important for IAG to maintain a strong capital position.

“We have experienced an immensely challenging second half to the 2020 financial year, characterised by severe natural peril activity, the disruption caused by the COVID-19 pandemic to our people, customers and suppliers, and the marked volatility in investment markets which has adversely impacted our results,” Mr Harmer said.

The result added to the sector’s woes after QBE flagged a $US600m ($840m) impact from COVID-19 on Wednesday and a first-half loss of $US750m.

Pandemics ‘excluded’

IAG scrapped its final dividend because the 10c interim distribution — paid in March — was equivalent to full-year cash earnings of $279m, if the board applied the top end of its dividend payout ratio of 60-80 per cent.

The company added to uncertainty surrounding the sector by insisting that the wording of its business interruption policies would prevent an avalanche of claims, because pandemics were excluded.

The company’s confidence is about to be tested in the courts, with Credit Suisse estimating a net claims exposure of about $150m for IAG if its confidence is misplaced.

Shares in IAG, which owns brands including CGU Insurance, NRMA Insurance, SGIO and SGIC, gave up 45c, or 7.8 per cent, to $5.32.

At the beginning of the year the stock fetched $7.58.

Mr Harmer, who will retire before the end of the year, highlighted a softening in the insurance margin to 10 per cent from previous guidance of 12.5 per cent to 14.5 per cent.

This was mainly driven by adverse natural perils, reserving in prior periods and credit spread factors.

“(The softening) stems from the combination of lower investment returns from diminishing interest rates, an increased reinsurance expense as we bolstered our protection from heavy perils incidence early in the calendar year, and some deterioration in Australian commercial long-tail loss ratios,” the IAG chief said.

“We enter the 2021 financial year with a strong balance sheet and enhanced reinsurance protection, and are well-equipped to negotiate the challenges and opportunities that a post-COVID environment will present.”

The estimated impact of COVID-19 on the reported insurance margin was broadly neutral.

While the $100m provision was the downside, it was offset by an equal net benefit from claim-cost and expense effects.

This reflected a lower volume of motoring claims, especially in April and May, partly offset by claim costs in other classes, particularly travel and landlords’ insurance.

The pandemic, however, resulted in a lower volume of new business, with gross written premiums falling by $80m from March to May, which lowered growth by more than 1 per cent in the second half.

IAG strengthened its prior period reserves by more than $50m in the second half.

IAG said it remained in a strong capital position, with a common equity tier one ratio of 1.23 at June 30.

Deputy chief executive Nick Hawkins, one of the leading internal candidates to succeed Mr Harmer, said IAG would not seek a higher yield on its investment portfolio.

“Directionally, interest rates are going to be down for some time,” Mr Hawkins said.