IAG expects FY20 reported insurance margin will be in the range of 14.5-16.5 percent

Australian insurer IAG now expects its FY20 reported insurance margin will be in the range of 14.5-16.5 percent, compared to previous guidance of 16-18 percent. This is according to an update to its FY20 reported margin guidance, based on expected results for the six months ended 31 December 2019 and on a revised view of full year net natural peril claim costs in the wake of the recent hailstorm event.

IAG will be releasing its detailed 1H20 results on 12 February 2020. Ahead of that, IAG has said that, subject to finalisation of audit review and board approval, it expects its 1H20 results to contain the following features: gross written premium (GWP) growth of around 1.4 percent (1H19: 4.1 percent), consistent with the ‘low single digit’ GWP growth guidance provided for the full year; an underlying insurance margin of 16.9 percent (1H19: 16.2 percent); and a reported insurance margin of 13.5 percent (1H19: 13.7 percent), after inclusion of net natural peril claim costs of $419 million; lower than anticipated net reserve releases of $5 million; and a modestly favourable credit spread effect.

It also expects to report a loss from fee-based business of $2 million (1H19: profit of $5 million); and a post-tax provision of approximately $80 million for customer refunds.
IAG’s managing director and CEO Peter Harmer said: “We are pleased with our underlying business performance, which continues to track in line with our expectations, both at the GWP and underlying margin levels, and in terms of the net benefits being realised from our optimisation program.

“We have, however, revised our reported insurance margin guidance for the full year, to reflect the recent heavy natural peril activity and a reduced expectation for prior period reserve releases following the lower than anticipated first half net reserve release outcome.”

IAG’s 1H20 results will contain a net post-tax provision of approximately $80 million for customer refunds, interest attributable to those refunds and the cost of administering the associated remediation program.

This relates to a specific multi-year pricing issue identified by IAG where discounts were not always applied in full to premiums for all customers who may have been eligible. IAG reported this issue to the Australian Securities & Investments Commission (ASIC) in September 2019.
The hail storms which have impacted parts of Melbourne, Canberra and Sydney over the course of 19 and 20 January 2020 will be treated as one event under IAG’s reinsurance arrangements.

Based on projected claim volumes and the severity of related damage, it is anticipated this event will result in a pre-tax cost to IAG of $169 million (post-quota share) in line with the maximum first event retention (MER) under IAG’s calendar 2020 catastrophe reinsurance protection. It is not expected that this event is large enough to require the purchase of any reinsurance reinstatement as part of the calendar 2020 program.

Following this event, IAG’s MER is $135 million (post-quota share), in line with the second event retention indicated in the company’s calendar 2020 catastrophe reinsurance renewal announcement on 3 January 2020.

By 5pm on 23 January 2020, IAG had received over 28,000 claims resulting from the hailstorm event, with this figure expected to increase over the coming days. The majority of claims relate to residential property and motor damage.

After consideration of the preliminary 1H20 results and the recent hailstorm event, IAG has revised its FY20 guidance, to reaffirm its ‘low single digit’ GWP growth expectation; and reduce its reported insurance margin guidance to a range of 14.5-16.5 percent, from the previously advised 16-18 percent.

The 150 basis point reduction in FY20 reported insurance margin guidance is due to the combination of an approximately 50 basis point effect from reduction in prior period reserve release expectations to around 0.5 percent of net earned premium (NEP), compared to previous guidance of around 1 percent of NEP; and an approximately 100 basis point effect from an increased net natural peril claim cost assumption of $715 million, compared to previous guidance of $641 million which was in line with IAG’s FY20 perils allowance.

IAG said the modest level of indicated net prior period reserve releases in 1H20 is the result of stronger claim development across long tail classes than has been observed in recent years, together with the emergence of some large claims in these classes in excess of expectations. This has resulted in reserve strengthening in several Australian long tail classes, including professional risks, workers’ compensation and CTP in South Australia and the ACT. Lower NSW CTP reserve releases have been in line with expectations. Reserve releases in 2H20 are anticipated to represent up to 1 percent of NEP in that half.

In light of the recent hailstorm event, IAG has reviewed its assumption for net natural peril claim costs for FY20 and increased it by $74 million to $715 million.