By Danny John
Update Insurance Australia Group has been forced to dip into its cash reserves to pay for its increased full-year dividend after higher storm costs and continuing heavy losses in Britain resulted in a previously flagged halving of its 2010 net profits.
As expected, the insurer - whose brands include NRMA Insurance, RACV, CGU and The Buzz - turned in an annual bottom line result of just $91 million today, having warned the market last month of yet another dip in profits.
While its cash operating earnings from its main insurance business came in at $493 million compared with $515 million 12 months ago, the insurance margin was hit by the Melbourne and Perth storms earlier this year.
These incurred claims much higher than the group had planned for - 75,00 claims at a net cost of $210 million. The group also continues to be bedevilled by its untimely and now financially disastrous expansion into Britain.
Having taken large write-downs and losses over the past two financial years, IAG has followed up with another one-off charge of $367 million to cover an increase in bodily injury motor claims in the UK.
That figure too had been flagged to investors in its July statement to the ASX and has since resulted in a major overhaul of management in its British operations aimed at getting the business back on track.
IAG shares ended the day up 5 cents, or 1.5 per cent, to $3.32.
Dividend trim
The impact on the bottom line has been to reduce the second-half dividend increase from the market's expectations earlier this year of 6 cents a share to 4.5 cents a share in an effort to preserve capital.
Combined with the interim dividend, IAG is paying out a total dividend of 13 cents per share - a 30 per cent rise on last year's 10-cent distribution.
IAG said today that the pay-out will be at the top end of its 50-70 per cent range of payment out of cash earnings but with the bottom-line result so low it means that the remainder will have to be met from reserves from prior years.
Today's result varied little from the way IAG had sought to dampen the hopes of investors for a better outcome after four tough years in terms of investor returns.
Nonetheless, there will be disappointment that the group continues to struggle despite a change of management at the top from Michael Hawker to Mike Wilkins two years ago. In the meantime, James Strong who has chaired the group over the past nine years stood down this morning as flagged last November and has been replaced by existing director Brian Schwartz.
Mr Schwartz will oversee a greater focus on IAG's core Australian and New Zealand businesses which remain the company's major profit drivers despite the high storm cost claims that this year crunched its insurance profit margin down to 7 per cent.
The Australian and rapidly-improving New Zealand operations delivered 90 per cent of IAG's gross written premium revenue of $7.8 billion. That figure showed zero overall growth on last year although the underlying result was up 3.8 per cent once the impact of currencies and divested businesses is taken into account.
IAG today forecast an insurance profit margin in its current 2011 year which started on July 1 of between 10.5 per cent and 12.5 per cent against the backdrop of a anticipated rise in premium income of 3 to 5 per cent.
The targets for this year include a budget of $435 million for natural peril costs like the Melbourne and Perth storms earlier in 2010, a total which is significantly higher than what IAG had allowed for in the year just ended.
djohn@smh.com.au
BusinessDay