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IAG and Suncorp diverge in latest earnings results

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Headline financial results last week presented diverging stories for Suncorp and IAG, with the former basking in a better-than-expected outcome and IAG hit by organisational and risk management failures.

At the headline earnings level, Suncorp reported a net profit of $1.03 billion, up 13%, while IAG reported a loss of $427 million.

For IAG, one-off items cost the group around $1.5 billion pre-tax, including the provision of $1.15 billion for business interruption claims related to the pandemic and $238 million for customer refunds arising from past pricing issues.

IAG CEO Nick Hawkins says the group has taken action to prevent future problems, making changes to simplify and consolidate technical systems, and progressing a $100 million program of work, called Project rQ, to improve fundamental risk practices.

Morningstar Analyst Nathan Zaia says IAG is confident business interruption provisions are adequate to cover current lockdowns, and it’s assumed no further top-up will be needed. Other provisions relate to problems that should now be in the past.

“Hopefully we are not being too optimistic, but we believe management increasing customer refund and payroll provisions in a year already battered by provisions is an attempt to leave legacy problems in fiscal 2021,” he says.

Suncorp also has made provisions for business interruption, but at a much lower level, and has been less affected by outdated wordings citing the repealed Quarantine Act.

The underlying results for the two companies included some broad similarities as the insurers saw benefits from rising premium rates while on the flipside natural perils costs exceeded allowances and amounts have been increased for next year.

Both companies paid a higher ordinary dividend, while Suncorp rewarded capital return-focussed investors with a special dividend and a $250 million share buyback.

Macquarie Senior Equity Research Analyst Andrew Buncombe says the results include issues specific to IAG, while Suncorp has seen the benefit of an earlier start in areas aimed at improving performance.

“Putting business interruption aside, their cost-out program started sooner, portfolio remediation started sooner and their technology program stared years prior,” he told insuranceNEWS.com.au.

IAG, in contrast, still needs to significantly improve its technology systems, while it continues to see the effect of past personnel reductions that have impacted the business, he says.

The Suncorp result is broken down into Insurance (Australia), Banking and New Zealand. The Australian insurance trading result rose 29.6% to $644 million, supported by a 5.5% rise in gross written premium.

IAG under its new structure breaks down its results into Direct Insurance Australia, Intermediated Insurance Australia and New Zealand.

The Direct Insurance division reported an insurance profit of $718 million, up 14.5%, while the Intermediated division reported a loss of $10 million, narrowing from a $207 million loss a year-earlier.

IAG is aiming for the Intermediated division to achieve earnings of $250 million in 3-5 years, with an insurance margin reaching 10%, but in the meantime has highlighted problems such as the increased size of long-tail claims related to personal injury liability.

Jarrod Hill will join IAG from Chubb next month to lead the Intermediated division, which faces a range of challenges, some of which may require some painful surgery.

“My view is they need to walk away from 30-50% of the existing book,” Mr Buncombe says. “That is the only way they hit the 10% margin, and it’s not where they are headed.”

Suncorp also noted a “modest strengthening” of reserves in long-tail personal injury following past increases, but says it’s a relatively small portfolio for the company.

The insurer indicated commercial portfolio margins are “pretty much” where they would like them to be and it sees potential growth in business packages, but will carefully look at where it allocates capacity.

Jarden Group’s Kieren Chidgey says overall across their insurance businesses IAG lagged Suncorp on gross written premium but is well ahead on margins.

Both insurers are targeting strong medium-term improvements, but Suncorp’s needs to come from home and motor personal, versus commercial classes for IAG.

“With industry motor margins already robust and boosted by COVID lockdowns, Suncorp needs to swim against the tide,” Mr Chidgey says.

Both insurers also face threats from challengers at the same time as they are wanting to increase premiums without losing market share.

S&P Global Ratings takes the view that IAG can achieve a $1 billion turnaround this financial year, as its headline figure swings from a loss to a profit. It expects Suncorp to build on strong earnings momentum, after proving resilient in the face of more frequent natural disasters and COVID-related headwinds.

Against the background unknowns from COVID and catastrophes, it’s shaping up as a critical year for both insurers to show their mettle and for IAG to demonstrate that one-off problems really are in the past.