Insurance Australia Group (IAG) has reported a A$460m ($356m) loss for the December half of the current financial year, hit by the pre-tax A$1.15bn expense announced in November for potential business interruption claims relating to COVID-19.
The insurance industry lost a landmark court case over pandemic exclusions for business interruption policies.
Business interruption policies
Mr Hawkins said, “Our business interruption policies were never intended to cover pandemics. However, following the Supreme Court of NSW Court of Appeal decision on the COVID-19 business interruption test case, we conducted a detailed review to determine our potential exposure, and took action to strengthen our balance sheet.”
He told The Age and Sydney Morning Herald, after reporting the group’s interim results, “Obviously there were some wordings there that with hindsight aren’t as clear as they could have been.”
“Of course, they should have been updated at the time. With hindsight, that would have been a good move.”
Strong underlying performance
Mr Hawkins said that IAG had seen a strong underlying performance across its businesses over the first half of the financial year and would build on this performance as it sharpens its focus to deliver a stronger, more resilient company.
“We delivered 3.8% gross written premium (GWP) growth (1H FY2020: 1.4%) over the six months – a strong result in these uncertain conditions,” said Mr Hawkins.
Growth was predominantly driven by rate increases in commercial and home insurance businesses in Australia and across all key classes in New Zealand. It was also underpinned by some customer growth in New Zealand’s direct brands and high retention rates in our commercial portfolios in Australia.
Mr Hawkins added, “We have strong margins across the business. Our underlying margin of 15.9% was an improvement on 2H FY2020 (15.1%) and benefitted from lower motor claims as a result of COVID-19.
“Our insurance profit of A$667m (1H FY2020: A$501m) equated to a higher reported margin of 17.9% (1H FY2020: 13.5%). In addition to the COVID-19 effect, this result benefitted from a relatively benign natural perils period, which meant that IAG came in A$39m lower than its natural perils allowance, and credit spreads were favourable.
Despite the first-half loss, IAG announced a dividend of 7 Australian cents per share which represents a payout ratio of 37% of cash earnings.
To strengthen the business, AIG has over the past few months restructured its operations, splitting the Australia Division into Direct Insurance Australia and Intermediated Insurance Australia to better align its brands to customers and to bring a stronger focus to commercial and personal intermediated businesses.
Mr Hawkins said, “We are acting decisively to address the issues facing our business. We are working with the broader insurance industry to get clarity on how our business interruption policies should be interpreted in the context of COVID-19, and we continue to make progress on our customer remediation program.
“And today we have outlined our strategy which will allow us to deliver IAG’s full potential over the next three to five years.”
IAG’s financial results for the first six months of the financial year ending June 2021 are summarised as follows:
Insurance profit (A$m)
Underlying insurance margin (%)
– 100 bps
Reported insurance margin (%)
+ 440 bps
Net profit/(loss) after tax (A$m)