By Eric Johnston
INSURANCE Australia Group has prepared investors for the worst, warning that its full-year profit will be halved and dividends cut after it was buffeted by storms and hefty losses in Britain.
IAG has also tried to salvage its struggling British motor insurance business with an overhaul of its executive ranks.
Just a day after its bigger rival QBE Insurance issued a profit downgrade, IAG decided to make public some key numbers for what most analysts had already been expecting would be a poor full-year result.
True to form, after three profit warnings in the past year the headline result included a halving of net profit to just $91 million.
Last month IAG warned that its insurance margin, a key measure of profitability, would come in between 6 per cent and 7 per cent. Yesterday it predicted margins of 7 per cent.
Investors had already factored in the previously announced $367 million charge to profit relating to the British motor insurance business.
However, IAG, which is behind brands such as NRMA and RACV, has bitten the bullet by slicing its final dividend by 1.5¢ to 4.5¢ a share to preserve some capital.
This was enough to turn off investors, sending IAG shares down 4.3 per cent to close at $3.35.
The past six months have been tough for all insurers.
For the domestic players such as IAG and Suncorp Metway, there have been two large hailstorms in Perth and Melbourne, resulting in hefty payouts. In total, IAG's bill for disasters came in at $463 million for the year, well up on the $350 million it had budgeted for.
Investment earnings for the insurance industry have also been hit by the 12 per cent fall in equity markets and low bond yields.
Pressure clearly remains on insurance premiums. IAG's net earned premium of $7.1 billion for the year to the end of June was down from $7.2 billion the previous year.
There was some relief that IAG had stuck to its previous guidance, particularly since QBE's position deteriorated in the past month, mostly due to shaky investment markets.
However, analysts noted the IAG profit appeared to be pumped up by the bigger-than-expected release of insurance reserves.
''Obviously this might raise questions around the quality of the 2010 result,'' the Goldman Sachs JBWere insurance analyst Ryan Fisher said.
Despite the gloom, there is some evidence of an improving insurance market in Australia and New Zealand, and this is good news for Suncorp, which is still deeply engaged in turning itself around.
IAG stuck to its recent guidance of an insurance margin of 10.5 per cent to 12.5 per cent for fiscal 2011.
IAG is due to release its full-year result on August 26.