IAG Posts $571 Million Profit; Drop in 2nd Half Hits Shares; S&P Comments

August 19, 2005

Insurance Australia Group Limited (IAG) announced a net profit after tax of A$760 million (US$571 million) for its fiscal year ended 30 June 2005, a 14.3 percent rise over the A$665 million (US$500 million) it earned in fiscal 2004.

The IAG bulletin said the results reflected “strong operating and underwriting disciplines, integration synergies and a A$479 million (US$360 million) pre-tax contribution from shareholders’ investment income.”

That was the good news, but many analysts were disappointed by IAG’s second-half results, which reflected a 13 percent drop in profits to A$314 million (US$236 million) compared to the A$363 million (US$272.7 million) it earned in the same period of 2004. As a result the company’s shares fell sharply on the Sydney stock exchange.

Standard & Poor’s Ratings Services, however, didn’t seem too worried. It rates IAG as “AA” with a stable outlook and said the “full-year profit result to June 30, 2005, reflects the nonlife insurer’s strong performance across all businesses, which leverages off the group’s leadership business position, diversity, and strong business management. IAG has delivered continued double-digit profit growth, despite some slowing in premium growth in a softening market.”

IAG management was upbeat as well. CEO Michael Hawker, said a continued focus on long-term disciplines such as underwriting controls, risk selection and customer relationships, and a record 44 percent increase in investment income, had enabled the Group to produce another solid performance despite a more difficult operating environment. “Our ability to consistently generate quality returns in an increasingly competitive environment, where premiums are stable or reducing for customers, reflects our commitment to manage for the long-term.

“We’ve done this by adhering to tight underwriting disciplines and building stronger customer relationships through initiatives to better align our products, service and distribution networks with our customers’ needs. At the same time, we continue to manage our costs to ensure premiums remain affordable for customers into the future,” he continued. “Our result also benefited from the first full year of integration synergies from our CGU and NZI acquisition.” He also noted the good investment results and the A$516 million (US$387.7 million) the group recouped from pre-tax return on claims reserves. “As a result, we achieved a Group insurance margin of 16.3 percent, up from 13.5 percent in the previous corresponding period,” Hawker noted

“The group’s underwriting profit at a combined ratio of 92.1 percent remains very strong, both historically and against peers, and the insurance margin also showed a further strengthening,” stated S&P credit analyst Kate Thomson, Financial Services Ratings. “Final profit after tax of A$760 million, up 14.3 percent on 2004, reflects a continued focus on underwriting controls and risk selection, but also favorable investment markets, with IAG benefiting substantially from realized and unrealized gains.”

S&P did note, however, that it “agrees with the company’s projections that in a softening insurance cycle IAG’s insurance margin of 16.3 percent and profitability may normalize in 2006. The outlook for organic premium income growth for IAG is moderate in the current softening market, and the group’s intent to focus on underwriting profitable business will become increasingly important if competition-driven premium rate reductions intensify.”

“The small increase in industry premium income for the quarter to March 2005, compared with March 2004, highlights the degree to which premium rate decreases, influenced by competitive pressures, have become entrenched in the market,” Thomson added.

But S&P concluded that the Group “has maintained its very strong capital position, benefiting in part from solid earnings contribution, and is well placed to absorb softer market conditions or to fund further growth opportunities offshore.”

The full report and additional information, including presentations, is available on the company’s Website at: http://www.iag.com.au.

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