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IAG's NZ profit rises in 1H, warns $117M Kaikoura quake cost puts acid on risk pricing

Wednesday 22nd February 2017

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insurance Australia Group's New Zealand division boosted first-half earnings although the local business is still wearing the impact of pricier reinsurance, with the Kaikoura earthquakes costing it $117 million.

Sydney-based IAG's New Zealand business is the biggest general insurer in the country, with the AMI, State, NZI and Lumley Insurance brands on this side of the Tasman. The local division reported an insurance profit of A$36 million in the six months ended Dec. 31, up from A$11 million a year earlier but down from A$193 million in 2015.

Gross written premiums rose 5.4 percent to A$1.1 billion, and reinsurance expenses fell to A$311 million from A$340 million, although still higher than A$143 million in the first half of 2015. The local division had a reported insurance margin of 4.3 percent, from 1.4 percent in 2016, while its underlying margin was 15.3 percent, from 18.4 percent a year earlier.

In July 2015, IAG kicked off a sharing arrangement with Berkshire Hathaway where the US firm takes 20 percent of IAG's premiums and pays 20 percent of its claims. Last year the New Zealand unit's insurance profit was hit by a NZ$150 million increase to its risk margin from the February 2011 Canterbury earthquake event. The insurer went beyond its NZ$4 billion reinsurance cover and, when reporting last year's first half, announced it had entered into a NZ$600 million adverse development cover deal in excess of NZ$4.4 billion with Berkshire, giving it effective cover of up to NZ$5 billion on the February quake.

The insurer has completed 96.5 percent of its claims from Christchurch, valued at $6.1 billion, it said. Many of the remaining claims are complex or subject to litigation, and it expects them to take several years to finalise.

The Kaikoura earthquakes in November 2016 produced a net claim cost after reinsurance of $117 million, with any subsequent developments covered by its 2016 catastrophe reinsurance. This led to natural peril claim costs of A$123 million in the first half, from A$14 million in 2016, with a A$91 million impact on insurance profit and an 11 percent impact on insurance margin for the first half.

IAG said the New Zealand division is expected to remain competitive in the second half, and it will focus on appropriately pricing risk "with added emphasis following the recent Kaikoura earthquake", while underlying profitability is expected to remain strong.

The Australian parent reported a 4.3 percent drop in first-half profit to A$446 million though it saw a 5.5 percent gain in gross written premium to A$5.8 billion, with reported margin at 13.5 percent. The board declared a fully-franked interim dividend of 13 Australian cents per share, unchanged from a year earlier, payable on March 30.

IAG lifted its full year guidance to "low single-digit growth" from the flat growth it had predicted previously, maintaining its reported margin guidance around the middle of the range between 12.5 percent and 14.5 percent. 

The ASX-listed shares last traded at A$5.91, and gained 8.5 percent in the past year.

BusinessDesk.co.nz



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