07/23/2021 | Press release | Distributed by Public on 07/22/2021 16:56
The preliminary results, which are subject to finalisation of audit and Board approval, reflect sound underlying financial performance offset by a number of unusual items, resulting in a reported
IAG Managing Director and CEO Nick Hawkins said:
'Our underlying financial results for the year are sound and within expectations. However, we have had challenges with issues that have been identified and provisioned for in our preliminary results.
'We have at our core a strong insurance business with trusted market leading brands, and we have worked hard and acted decisively to put in place changes that address these challenges and enable us to better deliver to our shareholders, employees, customers and our communities.
'I have built a strong leadership team with deep insurance and customer expertise and clear accountability for success. We have a new organisational structure that more clearly aligns the business with our customers, and we have a clear growth strategy for the future.
'The confidence we have with the business and outlook have allowed for the reintroduction of guidance for FY22, where I expect an improvement in our adjusted underlying performance from FY21,' Mr Hawkins said.
Comparative segmental results for 1H20, 2H20 and 1H21 under IAG's new operating model have also been included as part of this release.
Preliminary FY21 financial highlights
IAG expects its preliminary FY21 results will contain the following features:
Ÿ Gross Written Premium (GWP) growth of 3.8%, including a 2H21 growth rate of 3.9% and negligible 2H21 GWP COVID-19 impacts;
Ÿ Net Earned Premium of $7,473 million, growth of 1.5% on FY20;
Ÿ An underlying insurance margin of 14.7% (FY20: 16.0%), including a second half result
Ÿ A reported insurance margin of 13.5% (FY20: 10.1%):
Ÿ A pre-tax gain on shareholders' funds income of $306 million (FY20: loss of $181 million);
Ÿ A reported net loss of $427 million (FY20: net profit of $435 million), with a reported profit of
$33 million in 2H21; and
Ÿ Cash earnings of $747 million (FY20: $279 million), which excludes provision changes and other items identified in the net corporate expense line, $200 million (pre-tax) of which was recorded in 2H21. IAG's dividend policy is to pay out 60-80% of cash earnings on a full year basis.
The predominant impact from the COVID-19 pandemic occurred in 1H21, where it is estimated to have had a modestly negative effect on IAG's GWP and a net positive impact on its insurance profit. No material overall impact was experienced in 2H21.
The underlying insurance margin of 13.5% in 2H21 compares to 15.9% in 1H21, which included the net benefit of $60-$70 million from COVID-19 effects. Excluding the COVID-19 benefit, the 1H21 adjusted underlying margin was 14.2%. The reduction to 13.5% in 2H21 includes additional expenses associated with IAG's new operating model, property consolidation costs in New Zealand (both of which are not expected to recur) and a reversal of the relatively benign large loss experience in New Zealand during 1H21, with the full year experience being broadly in line with expectations.
Prior period reserve strengthening
Prior period reserve strengthening of $81 million occurred in FY21 (1H21: $15 million) compared to a strengthening of $48 million in FY20. This outcome reflected more adverse claim development across long tail classes than observed in recent years, particularly across the commercial liability portfolio where a sharp deterioration in average claim size has emerged.
The overall strengthening in FY21 reflects offsetting elements across IAG's businesses:
Ÿ Prior year reserve deterioration of $119 million occurred mainly across commercial classes in Intermediated Insurance Australia (IIA) (1H21: $34 million). Adverse trends appear to be driven by systemic issues where mixed economic conditions have enhanced focus on personal injury compensation. More specifically, the deterioration in IIA included:
Ÿ Releases were reported for personal classes in New Zealand of $36 million in FY21 (1H21: $18 million) reflecting favourable working claims development.
FY21 Net corporate expense
IAG expects to record a pre-tax net corporate expense of $1,510 million in FY21, which includes $200 million recorded in the second half.
Ÿ Business interruption provision
Ÿ Customer refund provision
Ÿ Payroll compliance provision
Ÿ Swann class action
IAG announced on 19 July 2021 that AmGeneral Holdings Berhad, the Malaysian business in which it holds a 49% interest, had signed an Implementation Agreement for the proposed sale of its insurance business to Liberty Insurance Berhad and expects to incur a loss. This investment has been classified as 'Held for Sale' and an impairment of approximately $90 million has been recognised in amortisation and impairment. The sale is expected to result in an increase in IAG's regulatory capital position of approximately $150 million at completion which is expected to occur in financial year ending 30 June 2022.
IAG remains in a strong capital position, with an anticipated CET1 ratio of 1.06 at 30 June 2021. This has reduced from 1.19 at 31 December 2020 which reflects the payment of the interim dividend, preliminary net profit in 2H21, and an increase in anticipated capital risk charges.
IAG is reintroducing guidance given the sound underlying financial performance in FY21, the new operating model now embedded with new executive responsibilities, and less uncertainty in the economic outlook. Guidance for FY22 includes the following:
Ÿ GWP guidance for 'low single-digit' growth in FY22. This incorporates modest growth in customer numbers in Direct Insurance Australia (DIA), ongoing rate increases across personal and commercial lines and further portfolio remediation which is expected to constrain IIA volume growth;
Ÿ Reported insurance margin guidance of 13.5 - 15.5%. Assumptions supporting this include:
'While our adjusted underlying FY21 performance delivered an insurance margin of around 14%, I'm confident that, with the steps we have in place, we will deliver business and customer growth,' Mr Hawkins said.
'Our direct insurance businesses in Australia and New Zealand are growing and we expect this growth to continue as we build out our premium brands across Australia.
'We recognise that our Intermediated business has underperformed which is why I have set specific goals for this business to simplify its structure, upgrade its risk and underwriting disciplines, further strengthen relationships with broker partners, and improve its financial returns.'
Segmental reporting disclosure
IAG announced on 2 November 2020 that the previous Australia Division would be split into DIA and IIA, effective from that date. As previously reported, IAG will report separate results for the two new divisions as part of the FY21 result. Comparative results for 1H20, 2H20 and 1H21 have been provided with this release.
The business entities and products that form DIA and IIA accounted for 46% and 32% of Group GWP respectively in 1H21. As previously indicated, profitability is currently firmly skewed in favour of DIA. In addition, the following should be noted:
Ÿ Reported and underlying margins in DIA were elevated in 2H20 and 1H21, primarily from previously highlighted COVID-19 benefits due to lower motor claim frequency;
Ÿ IIA's reported and underlying margins in 2H20 were impacted by the provision for COVID-19 claims costs of approximately $100 million; and
Ÿ Excluding the COVID-19 effect in 2H20, IIA's underlying margin was negligible and recovered to around 4% in 1H21, as higher rates earned through.
FY21 results announcement
IAG will announce its final FY21 results on 11 August 2021 following completion of audit and Board approval.
This release has been authorised by the Board of Insurance Australia Group Limited.
IAG defines its underlying insurance margin as the reported insurance margin adjusted for:
- Prior period reserve strengthening/releases;
- Net natural peril claim costs less related allowance for the period;
- For FY20 an allowance for reserve releases of 1% of NEP, with no allowance in FY21; and
- Credit spread movements.
The FY21 reported insurance margin indicated in this announcement is presented on a management reported (non-IFRS) basis which is not directly comparable to the equivalent statutory (IFRS) figure that will appear in IAG's FY21 Financial Report (Appendix 4E). On a statutory basis the reported insurance margin is expected to be negative 5.8% (a reduction of 1260bps), after inclusion of the $1150 million business interruption provision, $238 million customer refund provision and $51 million payroll compliance provision.