IAG warns $117m Kaikoura quake cost puts acid on risk pricing

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 $A36 million in the six months ended December 31, up from $A11 million a year earlier but down from $A193 million in 2015.

Gross written premiums rose 5.4% to $A1.1 billion, and reinsurance expenses fell to $A311 million from $A340 million, although still higher than $A143 million in the first half of 2015. The local division had a reported insurance margin of 4.3%, from 1.4% in 2016 while its underlying margin was 15.3%, from 18.4% a year earlier.

In July 2015 IAG kicked off a sharing arrangement with Berkshire Hathaway where the US firm takes 20% of IAG's premiums and pays 20% of its claims. Last year the New Zealand unit's insurance profit was hit by a $NZ150 million increase to its risk margin from the February 2011 Canterbury earthquake event. The insurer went beyond its $NZ4 billion reinsurance cover and, when reporting last year's first half, announced it had entered into a $NZ600 million adverse development cover deal in excess of $NZ4.4 billion with Berkshire, giving it effective cover of up to $NZ5 billion on the February quake.

The insurer has completed 96.5% 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 $A123 million in the first half, from $A14 million in 2016, with a $A91 million impact on insurance profit and an 11% 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% drop in first-half profit to $A446 million though it saw a 5.5% gain in gross written premium to $A5.8 billion, with reported margin at 13.5%. The board declared a fully-franked interim dividend of 13Ac 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% and 14.5%.

The ASX-listed shares last traded at $A5.91 and gained 8.5% in the past year.

(BusinessDesk)