IAG today provided an update on its results for the year ended 30 June 2020 (FY20), within which it expects to report:
IAG will be releasing its detailed FY20 results on 7 August 2020. Ahead of that, IAG advises that, subject to finalisation of audit and Board approval, it expects its FY20 results to contain the following features:
IAG’s Managing Director and CEO Peter Harmer said: “We have experienced an immensely challenging second half to the 2020 financial year, characterised by severe natural peril activity, the disruption caused by the COVID-19 pandemic to our people, customers and suppliers, and the marked volatility in investment markets which has adversely impacted our results.
“I am proud of the way our people have risen to the challenges we have seen, maintaining a high level of commitment to our customers through a sequence of major natural peril events in the middle of the financial year. And then, with the emergence of COVID-19, through the swift implementation of customer support measures for those suffering hardship as we rapidly shifted to home working arrangements.
“We have seen some softening in our underlying margin in the second half. This stems from the combination of lower investment returns from diminishing interest rates, an increased reinsurance expense as we bolstered our protection following heavy perils incidence early in the calendar year, and some deterioration in Australian commercial long tail loss ratios.
“We enter FY21 with a strong balance sheet and enhanced reinsurance protection, and are well-equipped to negotiate the challenges and opportunities that a post-COVID environment will present,” Mr Harmer said.
COVID-19 impacts on FY20 financial performance
The COVID-19 pandemic is estimated to have had a modestly negative effect on IAG’s GWP in FY20, and a broadly neutral impact on its reported insurance margin.
Lower new business volumes are estimated to have reduced GWP by approximately $80 million across the months of March to May 2020, and lowered GWP growth in 2H20 by over 1%. Since the end of May, IAG has seen new business volumes return to more normal levels in most of its core portfolios, while retention levels have remained high over the course of FY20.
An estimated broadly neutral COVID-19 effect on IAG’s FY20 reported insurance margin contains two elements:
Prior period reserve strengthening
IAG has strengthened its prior period reserves by over $50 million in 2H20, compared to previous guidance of reserve releases equivalent to 1% of net earned premium (NEP) in that period. Contributing to a full year net strengthening of $48 million, this action reflects stronger claim development across Australian long tail classes than observed in recent years and further emergence of large claims in excess of expectations. It also recognises the uncertain macroeconomic environment and its potential impact on reserves.
The 2H20 net strengthening includes the following movements from Australian long tail classes:
IAG anticipates negligible impact from net prior period reserve movements in FY21, given the heightened uncertainty attached to long tail reserve development in the current economic and operating conditions.
Customer refund provision
In 1H20 IAG included a pre-tax provision of $150 million for customer refunds, interest attributable to those refunds and the cost of administering the associated remediation program. This related to a specific multi-year pricing issue identified by IAG where discounts were not always applied in full to premiums for all customers who may have been eligible.
This provision has been increased by $96 million in 2H20, to $246 million pre-tax, to cover two further refund programs in respect of similar pricing issues.
On a post-tax basis, the customer refunds provision amounts to $141 million for the full year, compared to an initial amount of $82 million recognised in 1H20.
All the issues concerned relate to Australia and were identified as part of a proactive review of pricing systems and processes which is ongoing.
Capital and dividend
IAG remains in a strong capital position, with an anticipated Common Equity Tier 1 (CET1) ratio of 1.23 at 30 June 2020. While comfortably above its targeted CET1 range of 0.9-1.1, IAG regards the current economic circumstances and uncertainty as justifying a more conservative approach to capital than would otherwise be required.
IAG’s FY20 cash earnings are expected to amount to $279 million. Applying the top end of IAG’s 60-80% targeted payout ratio, this would equate to a full year dividend payment similar to the 10 cents per share interim dividend paid in March 2020. Consequently, and while subject to finalisation of audit and Board approval, it is anticipated that no final dividend will be paid in respect of FY20.
While IAG recognises many shareholders will be disappointed with no final dividend, it believes it is important to adhere to its long-established dividend payout policy and to maintain a strong capital position in the current uncertain environment.
IAG enters FY21 with strong reinsurance cover in place, including access to significant protection under its calendar 2020 aggregate cover. The combination of covers in place at 1 July 2020 results in an estimated maximum event retention of $41 million (post-quota share) at that date, based on current estimates of losses incurred in 2H20 and a gross next event in excess of $250 million.
In addition, IAG has continued to pursue initiatives that strengthen its overall reinsurance position, including:
FY20 results announcement
IAG will announce its detailed FY20 results on 7 August 2020.
This release has been authorised by IAG's Disclosure Committee.
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