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IAG Downgrades Insurance Margin
Australian insurance major IAG saw its shares plunge to 15 month lows and by as much as 11 per cent following the company cutting guidance on its full year insurance margin.
The company cut its insurance margin guidance for the year ending June 30th by more than 3 percentage points to between six and seven per cent, after initially announcing guidance of between 9.5 to 11 per cent.
Rising claims in its UK motor insurance business was the reason for the reduction, after the company swallowed a pre-tax charge of $365 million, which it plans on using to strengthen its claim reserve for that business.
IAG says it will also writedown a further $86 million in goodwill and other intangibles on its UK business.
IAG is an underwriter in the UK motor insurance industry, and owns the UK’s fifth largest motor insurance company, Equity Red Star.
“We do believe that this is an issue that’s peculiar to the UK. Having identified that issue we have now acted quickly, and we believe appropriately, to manage the issue and to the maximum extent we can put a cap on it.” chief executive Michael Wilkins said in a teleconference on Wednesday.
IAG says its other business remain on target to meet expectations, with the group expecting to post a margin of 10.5 to 12.5 per cent during the next financial year in 2010/11.
Chief executive of IAG’s UK division Neil Utley said there had been a rapid growth in claim farming, or “no win, no fee” services in the UK.
“This has resulted in a significant increase in the cost of smaller third party claims as well as a notable rise in the number of injured parties for each individual accident. Despite the frequency of motor claims reducing, the frequency of injury claims has increased.” he said.
Included as part of the $365 million provision is $60 million the company paid as part of a re-insurance arrangement against a further $200 million in claim impairment.
Premiums will also be increased by 10 to 20 per cent across all of IAG’s UK businesses.
Mr. Wilkins added that he did not see rates in the company’s Australian business being impacted by events in the UK, and forecast single digit rate rise during the next financial year.
“We see far more modest increases coming through in our Australian business because we are satisfied with the underlying claims performance of those businesses,” he said.
The impact of the insurer downgrading its insurance margin on dividends is still yet to be decided, and a decision would be taken after the end of the financial year. IAG says it remains committed to paying between 50 to 70 per cent of its cash earnings.
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One Response to “IAG Downgrades Insurance Margin”
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The increase in no-win no-fee has definitely been a factor driving up the size of car insurance claims here in the UK. Not mentioned in your article, I would also suggest the rising problem of uninsured drivers is also becoming a major factor here.