Wesfarmers Insurance has posted a first-half operating profit of $110 million for the six months to December 31 – a vast improvement on the $23 million the division made in the first half of the previous financial year.

Revenue for the insurance business also rose, up 9.5%, to $1.035 billion for the half-year. 

But outgoing Wesfarmers Insurance MD Rob Scott says the recent flooding in Queensland and northern NSW will cost the company around $30 million, while bushfires across the east coast of Australia during January, which have generated claims in the order of $10 million, will impact on second-half earnings.

He says the level of claims from these events “reflect the improved risk selection and exposure management efforts of recent years”. 

The company says that in the absence of further significant catastrophe events, second-half insurance earnings should be “substantially” above the same period last year. But Mr Scott says further decreases in interest rates in the second half could also “present a downside risk to full-year earnings”.

In the underwriting business, gross written premium rose 8.7%, despite the company further reducing its exposures to what it calls “higher risk categories and geographies, including flood-prone areas in northern Queensland”.

A rise was also recorded in earned premiums due to changes to reinsurance arrangements and premium rate increases implemented in the previous financial year. The company says “modest rate increases” have also continued into the current financial year.

Earnings before interest, tax and amortisation (EBITA) from underwriting were $72 million for the half, up from a $10 million loss in the first half of 2011/12.

The insurance margin was 10%, while natural catastrophe claims in line with expectations for the first half and cost reduction initiatives helped the combined operating ratio to 94.9%, down from 108%.

The company reports “steady income growth” in its broking division, despite “challenging trading conditions in the Australian SME sector”, which it expects to continue in the future.

Earnings before interest, taxes, depreciation and amortisation in the OAMPS and Crombie Lockwood broking business was $38 million for the half, up slightly from the $35 million posted in the previous corresponding period.

The company attributes the turnaround in its insurance business to a “strong underwriting performance due to improved loss ratios through better risk pricing and exposure management, a more favourable claims environment and the introduction of operational claims efficiencies”.