The long-suffering shareholders of Insurance Australia Group can be forgiven for asking when their financial pain might end.
While today’s annual result is very much in line with the profit warning that the company issued in June, the actual figures don’t provide much comfort after yet another difficult year all round.
After the first-half disappointment of the group’s 2009 financial year, which held back any significant improvements following the overall losses of 2008, this time around it was a bad second half that did all the damage.
And while IAG like all of its domestic peers has had to handle some extremely large and costly natural peril claims like the Melbourne and Perth storms, there is one factor which has constantly blighted the group’s results throughout this period.
That, of course, has been its ill-timed and now financially disastrous expansion into the UK. Much of 2009 and part of 2010 was spent trying to put right that experiment and it had been hoped that the remedial action was going to pay off by the end of this financial year.
But then came an additional one-off charge of $367 million in the second half of 2010 to cover much higher bodily injury claims than expected. Combined with the impact of storm damage claims in Australia this basically wiped out the prospects for a sustained improvement at both the underwriting and net profit levels.
That much is explained in its starkest form by the half-year comparison figures released as part of IAG’s financial statements to investors this morning.
What is also clear is that without the benefit of its investment income and reserve releases the picture at the bottom line would be a lot worse than even the stuttering net profit figures that have typified the group’s accounts for 2009 and 2010.
In 2009 for instance, a first-half underwriting loss of $505 million became a pre-tax insurance profit thanks to an offsetting $732 million of investment income. Six months later, the insurance business produced a $240 million operating profit but there was only a small $48 million gain from investment income.
Nonetheless, most of that flowed through to the bottom line to produce not only a reasonable second half profit but also restore the group to profitability for the year as a whole after the 2008 loss of $261 million.
Investors then took heart from the first half of 2010 when a better underwriting result generated $278 million of operating earnings which when added to $210 million of investment income produced an insurance profit of $488 million. The result helped produce a first-half net profit of $329 million and better dividends to boot.
But then came those storm damage claims and the by-now perennial hit out of the UK in the second half. The improvement in the previous consecutive halves of underwriting profit turned into a $339 million loss between January 1 and June 30 of this year – a result that was only offset by $344 million of investment income which just keep the insurance profit in the black by $5 million.
Throw in all the normal costs and expenditures plus impairment charges as that slither of profit flowed to the bottom line and you end up with a net second half loss this time of $238 million.
So, all the hard work of the first half of 2010 was undone, much like that of the group’s experience in 2009 except it was the other way around.
Investors can but hope that the new financial year will tell a different story – and one where it won’t be a tale of two rather conflicting halves.
djohn@smh.com.au
