IAG NZ's profit slides as competition pushes down prices

Insurance Australia Group's New Zealand division had a 38% slide in annual profit as rampant competition for commercial customers pushed down prices.

The country's biggest general insurer also faced a higher risk margin on the Canterbury earthquakes.

Sydney-based IAG's New Zealand unit includes Lumley Insurance, NZI, AMI and State brands on this side of the Tasman.

The local division posted an insurance profit of $A135 million in the 12 months ended June , down from $A216 million a year earlier.

Gross written premiums (GWP) fell 3.7% to $A2.18 billion, with business GWP dropping 8% in kiwi dollar terms as heightened competition saw insurers discount commercial product lines.

Weaker margins in the second half "reflected the cumulative effect of competitive pricing pressure in the commercial market, as well as higher claim costs associated with the seasonally wetter months of May and June," IAG says.

"Harsher competitive conditions continued to place pressure on commercial product lines, especially property where IAG experienced item loss and rate reductions."

Across the wider IAG group, profit fell 14% to $A625 million on a 0.6% drop in GWP to $A11.37 billion, with both Australia and New Zealand experiencing challenging conditions.

The board declared a fully-franked final dividend of 13Ac per share, taking the annual payment to 26c, down from 29c a year earlier. It also announced a $A300 million off-market share buyback which is expected to be completed in mid-October.

IAG's New Zealand increased its consumer GWP 2% in local currency terms, with gains in auto insurance policies.

The insurer's claims experience in personal lines was higher than expected in the year with an expanding population and cheap petrol leading to more people on the roads, and IAG says it is taking a number of actions to cope with that trend "including increased excesses and greater use of preferred supplier networks."

The insurer's New Zealand profit was hit by $NZ150 million increase in the risk margin for the 2011 Canterbury earthquake, which it recognised in the first half of the year. IAG settled $5.7 billion of quake-related claims by the end of June, accounting for 93% of all claims.

IAG's New Zealand reinsurance cost more than doubled to $A623 million in the year while its underwriting expense dropped by 31% to $A252 million due to the quota sharing arrangement with Berkshire Hathaway that kicked off on July 1.

Under the arrangement the US firm takes 20% of IAG's premiums and pays 20% of its claims. Net claims expense dropped 18% to $A1.02 billion.

A 25% fall in commission expenses to $A181 million was partly due to quota sharing arrangements and also from lower volumes of business written through third parties.

IAG expects flat GWP in 2017 with competition likely to limit increases in personal lines and maintain pressure on business policies. Still, the insurer expects underlying profitability to remain strong.

The ASX-listed shares last traded at $A5.85 and have gained 7.2% so far this year.

(BusinessDesk)